Interm Macro- Test 2
If the per-worker production function is given by y = k^0.5, the saving rate is 0.15, and the depreciation rate is 0.05, then the steady state output per worker is what?
3
Suppose for an economy the total capital stock is 6 times one year's GDP and the depreciation of capital is 18 % of the GDP. In this case, we can conclude that the depreciation rate is equal to _________ %.
3 %
If we are transitioning to Golden Rule, if k* > k*gold then increasing c* requires what?
a fall in s -consumption is higher at all points in time
Suppose an economy is initially in a steady state with capital per worker below the Golden Rule level. If the saving rate increases to a rate consistent with the Golden Rule, then in the transition to the new steady state consumption per worker will what?
first fall below and then rise above the initial level
How do we find the s and k* that maximize c*?
find k*gold, the steady state value of k that maximizes consumption -then find saving rate that produces the k*gold
A higher saving rate is said to have a what?
level effect because only the level of income per person, NOT its growth rate, is influenced by the saving rate in steady state
Anything that affects the long-run rate of economic growth, even by a tiny amount, will have huge effects on?
living standards in the long run
Why does economic growth matter?
raises living standards and reduces poverty
If the marginal product of capital net depreciation equals 8%, the rate of growth of population equals 2%, and the rate of labor-augmenting technical progress equals 2%, to reach the Golden Rule level of the capital stock, the ___________ rate in this economy must be _________.
saving : increased
In the Solow growth model, the steady-state level of output per (effective) worker would be higher if the ___________ increased or the ______________ decreased.
saving rate : population growth rate
In an economy with population growth at rate n but without any technological progress, the change in capital stock per worker is given by the equation?
sf(k) - (delta + n)k
What is the equation of motion fork?
sf(k) - delta*k
What is the solow model's central equation and what does it do?
sf(k) - delta*k (Motion Fork Equation) -determines the behavior of capital k over time, which determines behavior of all the other endogenous variables because they all depend on k
In samples of economies with similar situations (savings and population growth rates, etc.), income gaps between rich and poor economies do what?
shrink about 2% per year
According to the Solow model, persistently rising living standards can only be explained by?
technological progress
The steady state value of k that maximizes consumption is called what?
the Golden Rule level of capital (k*gold)
What does depreciation reduce?
the capital stock
If two economies are otherwise identical ( same capital share, depreciation rate, technological growth rate, and population growth rate, etc.), but one economy has initially a lower level of capital per worker than the other, then as the countries approach the steady state what?
the country with the lower capital per worker will grow faster
What is the steady state?
where investment is equal to depreciation sf(k) = delta*k then capital per worker will remain constant (change in k = 0)
The solow model's steady state exhibits what?
balanced growth -many variables grow at the same rate
If (MPK-delta) > (n + g), the U.S economy is what?
below the Golden Rule steady state and should INCREASE s
What is the per worker production function?
shows how much output one worker could produce using k units of capital y = f(k)
What is the equation for saving per worker?
sy
Achieving the Golden Rule requires what?
that policymakers adjust s -this adjustment leads to a new steady state with HIGHER consumption
Investment increases what?
the capital stock
What does the steady state represent?
the long-run equilibrium of the economy
The Solow model predicts that Y/L and K/L grow at what?
the same rate g -they grow at approximately the same rate (about 2% per year)
What is the consumption function per worker?
c = (1-s)y = (1-s)f(k)= f(k)- sf(k) = y-sy
What is the equation for n, the rate that population and labor force grow?
change in L / L
What is the output per worker equation?
y = Y/L
In "per worker terms" what is the national income identity equation?
y = c + i where c = C/L and i = I/L
If two economies with the same production function, have the same depreciation rate, population growth rates and rates of technological progress, but one economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower saving rate what?
will be at a lower level than in the steady state of the high-saving economy
Who is credited for the Solow model?
Robert Solow won Nobel Prize for contributions to the study of economic growth
In the Solow model with population growth and technological progress, the steady-state growth rate of total output is what?
n + g
The production function y=f(k) means what?
output per worker is a function of capital per worker
What kind of countries grow faster?
poor countries
If we are transitioning to Golden Rule, if k* < k*gold then increasing c* requires what?
an increase in s -future generations enjoy higher consumption, but the current one experiences an initial drop in consumption
If two economies are otherwise identical ( same capital share, depreciation rate, technological growth rate, and population growth rate, etc.), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock will be what?
at the same level as in the steady state of the high capital economy
What equals investment at all times?
investment = saving, at all times
The per effective worker production function is given by y=k^0.5. And in this economy, the saving rate is 0.1, the depreciation rate is 0.04, the population growth rate is 0.02, the rate of technological change is 0.04. This economy ___________ at the Golden Rule steady state, therefore, the saving rate should ___________ to maximize the consumption (per effective worker)
is not : be increased
The capital output ratio (K/L) in the U.S data shows what?
it has remained constant over time since 1950
What is different about K in the Solow model than in the model in chapter 3?
it is no longer fixed, investment causes it to grow, depreciation causes it to shrink
What is different about L in the Solow model than in the model in chapter 3?
it is no longer fixed, population growth causes it to grow
An increase in the saving rate leads to what?
-higher output in the long run -faster growth temporarily -but not faster steady-state growth
What does the Solow model say about the relationship between saving and economic growth?
-higher saving leads to faster growth in the Solow model, but only temporarily -an increase in the rate of saving raises growth only until the economy reaches the new steady state -if the economy maintains a high saving rate, it will maintain a large capital stock and a high level of output, but it will not maintain a high rate of growth forever
What are the two effects on consumption an increase in s has?
-leads to higher k* and y*, which raises c* -reduces consumption's share of income (1-s), which lowers c*
What is the Solow model used for?
-to show economic growth -widely used in policy making -benchmark against which most recent growth theories are compared -looks at determinants of growth and standard of living in the long run
Lessons of growth theory help us what?
-understand why poor countries are poor and design policies that can help them grow -learn how our own growth rate is affected by shocks and our government's policies
In the Solow model with population growth and technological progress, the steady-state growth rate of output per effective worker is what?
0
If the per-worker production function is given by y = k^0.5, and the depreciation rate is 0.05, then Golden Rule steady state value of saving rate is what?
0.5
Suppose the marginal product of capital is 0.09, depreciation rate is 0.05, and technology is growing at 0.03. If the economy is at a steady state where consumption is being maximized, then the population growth rate must be:
1 %
The per effective worker production function is given by y=k^0.5. And in this economy, the saving rate is 0.1, the depreciation rate is 0.04, the population growth rate is 0.02, the rate of technological change is 0.04, then the steady-state k and y are?
1 : 1
The economy does NOT have a tendency to move towards which steady state?
Golden Rule steady state
____________ cause(s) the capital stock to rise, while ___________ cause(s) the capital stock to fall
Investment , depreciation
What is the Golden Rule condition?
MPK = delta
In the Solow model with population growth and labor-augmenting technological progress, which of these describes the condition for the maximization of consumption per effective worker at the steady state?
MPK = delta + n + g
What is the national income identity equation?
Y = C + I
In aggregate terms, what is the production function?
Y = F(K, L)
If a government's tax revenue is less than what it spends, then the government runs a budget __________, which lead to the _________ national saving, and the _________ saving rates compare to the government with the balanced budget.
deficit ; negative effect on ; lower level of
What is the amount of capital that depreciates each year?
delta*k
In the Solow growth model with population growth and labor-augmenting technological change, the break-even level of investment must cover what?
depreciating capital, capital for new workers, and capital for new effective workers
What does the delta represent?
depreciation rate -the fraction of the capital stock that wears out each period
In the Solow growth model with population growth and technological progress, the steady-state growth rate of capital per effective worker is _____________, and the steady-state growth rate of capital per (normal) worker is _____________.
zero , the rate of technological progress
What are two reasons the steady state is significant?
1) an economy at the steady state will stay there 2) an economy NOT at the steady state will go there **regardless of the level of capital with which the economy begins, it ends up with the steady-state level of capital
If the per-worker production function is given by y = k^0.5, and the depreciation rate is 0.05, then the Golden Rule steady state level of capital per worker is what?
100
If the labor force L is growing at a 3 % rate and the efficiency of a unit of labor E is growing at a 2 % rate, then the number of effective workers L*E is growing at a rate of?
5 %
Suppose for an economy the capital stock is 6 times one year's GDP and the capital income is 30% of GDP. In this case, we can conclude that the marginal product of capital is equal to __________ % per year.
5 %
IF the per-worker production function is given by y = k^0.5, the saving rate is 0.15, and the depreciation rate is 0.05, then the steady state capital per worker is what?
9
Assume that two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state the country with the higher saving rate will have ______________ level of output per worker and ____________ rate of growth of output per worker compared to the country with the lower saving rate.
a higher, the same
The Solow model shows that the saving rate is what?
a key determinant of the steady-state capital stock
In the Solow growth model in chapter 8, the steady state occurs when?
capital per worker is constant
What does the Solow model really predict?
conditional convergence -countries appear to be converging to their own steady states, which are determined by such variables as saving, population growth, and human capital, etc.
In the Solow model with population growth and technological progress, the steady-state growth rate of output per worker is what?
g
In international data with all countries in the world, many poor countries do NOT do what?
grow faster than rich ones
The solow model predicts that, other things equal (s, n, g), poor countries (with lower Y/L and K/L) should what?
grow faster than rich ones
Policies that alter the steady-state growth rate of income per person are said to have a what?
growth effect
What is the "best" steady state?
has the highest possible consumption per person c* = (1-s)f(k*)
If the saving rate is high, the economy will what?
have a large capital stock and a high level of output in the steady state
If the saving rate is low, the economy will what?
have a small capital stock and a low level of output in the steady state
In steady state, k* is what, but in the golden rule steady state k*gold is what?
in the steady state, k* is the point where the two lines cross, but in the golden rule steady state k*gold is where the gap is the largest between the two
Starting from a steady-state situation, if the saving rate increases, capital per worker will what?
increase until the new steady state is reached
In the Solow growth model, if investment exceeds depreciation, the capital stock will __________, and output will __________ until the steady state is attained.
increase, increase
Which of these policies of the government is NOT designed to increase resources devoted to research and development?
increasing the amount people can put in tax-exempt retirement accounts
Differences in which of these variables do NOT prevent countries from converging to the same steady state?
initial capital stock per worker
What is the equation for a change in capital stock?
investment - depreciation *** since i = sf(k), it becomes sf(k) - delta*k
What is the capital per worker equation?
k = K/L
If the per effective worker production function is given by y=k^0.5, the steady-state value of k in the Solow model with population growth rate at n and the rate of technological progress g is what?
k* = (s/delta + n + g))^2
With a per-worker production function y = k^0.5, the steady state capital stock per worker (k*) as a function of the saving rate (s) is given by?
k* = (s/delta)^2
A higher saving rate leads to a what?
larger capital stock and a higher level of output in the long run
The population and labor force grow at what rate?
n
The balanced growth property of the Solow growth model with population growth and technological progress predicts which of these sets of variables will grow at the same rate g (the rate of technological progress) in the steady state?
output per worker, capital per worker
Solow growth model shows that , in the long run, a country's standard of living depends on what?
positively on its saving rate
In the Solow growth model, for any given capital stock, the __________ determines how much output the economy produces, and the _____________ determines the allocation of output between consumption and investment.
production function, saving rate
What is k*gold?
the golden rule level of capital , the steady state value of k that maximizes consumption
Countries converge to same (similar) steady states if and only if what?
they are experiencing same (similar) saving, population growth, and human capital, etc. -this prediction is true in the real world
Balanced growth refers to the property where what?
values of many variables within a country rise together in the steady state
Consider an economy described by the aggregate production function: Y = F(K, L) = K^0.5L^0.5, the per-worker production function in this economy should be?
y = k^0.5
Consider an economy described by the labor-augmenting aggregate Cobb-Douglas production function: Y = F(K, LE) = K^0.5(LE)^0.5, the per effective worker production function in this economy should be what?
y = k^0.5
For a general Cobb-Douglas function, what is the per worker function?
y = k^alpha y = Y/L = (K^alphaL^1-alpha)/L =(K^alpha*L^1-alpha) / (L^alpha*L^1-alpha) = K^alpha/ L^alpha = k^alpha
If the per effective worker production function is given by y=k^0.5, the steady-state value of y in the Solow model with population growth rate at n and the rate of technological progress g is what?
y* = s / (delta + n + g)