Ch 9 Macro

is the most important determinant of the economic well-being of a nation's citizens.

Long Run economic growth

An economy has a depreciation rate of δ = 0.03, a population growth rate of n = 0.05, and a rate of rate of labor-augmenting technological progress of g = 0.02. The marginal product of capital is 0.1 in the steady state, so the saving rate would need to _____ in order to reach the Golden Rule steady state.

remain the same

If E = 1 in 1990 and then increases to E = 1.5 in 2000, all else constant, then it took _____ worker(s) in 1990 as long as it takes two workers in 2000 to produce the same output.

3

Suppose an economy is described by the Solow model. The rate of population growth is 1 percent, the rate of technological progress is 3 percent, the depreciation rate is 5 percent, and the saving rate is 10 percent. In steady state, output per person grows at rate of

3 percent.

An economy in the steady state has a marginal product of capital of 9 percent, a rate of depreciation of 3 percent, a population growth rate n of 1 percent, and rate of technological progress of g = 1 percent. According to the text, this economy could _____ in order to achieve the Golden Rule capital per effective worker.

increase the saving rate

How can policymakers encourage research and technological progress?

By ensuring proper incentives

The economy of the Southern Kingdom has a saving rate of s = 0.20, a depreciation rate of δ = 0.05, a population growth rate of n = 0.01, and a growth rate of effective labor g = 0.02. In the steady state, output per worker will grow at rate _____, and total output will grow at rate _____.

0.02; 0.03

According to the text, if economies converge (that is, if the gap in income per person becomes smaller), then this gap shrinks on average by about _____ percent per year.

2

If the per-worker production function is given by y = k1/2, the saving rate is s = 0.16, the population growth rate is n = 0.03, the depreciation rate is δ = 0.03, and the rate of labor-augmenting technological progress is g = 0.02, then the steady-state level of capital per effective worker is:

4.

If the capital stock is 2 times annual GDP, depreciation is 8 percent of GDP, and capital income is 20 percent of GDP, then the net marginal product of capital is

6

In the Solow model, technological progress is determined outside the model. However, a different set of growth models, called _____ growth theories, explain technological progress within the model.

Endogenous

According to the text, capital markets in countries with legal systems based on English-style common law tend to allocate resources more efficiently that those in countries with legal traditions that evolved from the French Napoleonic Code. All of the following nations base their legal systems on English-style common law EXCEPT:

FRANCE

In the Solow model, with labor-augmenting technological progress and population growth, if the production function is y = k1/2, s = 0.4, δ = 0.03, n = 0.05, and g = 0.02, then the steady-state level of capital per worker _____ the Golden Rule level.

If y = k1/2, s = 0.4, δ = 0.03, n = 0.05, and g = 0.02, the steady state occurs when .4 × k1/2 = (0.03 + 0.05 + 0.02) × k or at k* = 16. LESS than

MPK formula is?

MPK=δ+n+g,

The ratio k = K / (E × L) is called:

capital per effective worker.

Introducing labor-augmenting technological progress into the production function requires that the production function Y = F(K, L) be rewritten as:

Y = F(K, E × L).

standards of living is attributable to a

combination of capital accumulation and the efficiency with which capital is used.

In the Solow model, with labor-augmenting technological progress and population growth, the steady-state level of capital per effective worker will:

always be achieved, regardless of the starting point of the economy.

Increased public saving and tax incentives for private saving both encourage

capital accumulation.

In the Solow model with labor-augmenting technological growth, the Golden Rule level of capital per effective worker is defined as the steady state that maximizes:

consumption per effective worker.

Policymakers can also promote economic growth by setting up the appropriate legal and financial institutions to allocate resources efficiently, by supporting a

culture conducive to growth, and by ensuring proper incentives to encourage research and technological progress.

According to the text, when the steady-state capital stock is above the Golden Rule capital stock, the saving rate should:

decreased

Policymakers in the United States and other countries often claim that their nations should

devote a larger percentage of their output to saving and investment.

According to the text, convergence of economies as measured by a shrinking gap in income per person, Y / L, is observed among:

economies that are similar in economic culture and policies but not among all economies.

Over time, E increases for all of the following reasons EXCEPT when:

employers strive to generate maximum profit from their workers.

The purpose of ________ growth theory is to explain technological progress Some of these models do so by questioning the Solow Growth Model assumption of _________ returns to capital

endogenous, diminish

Many empirical studies have examined the extent to which the Solow model can help explain

explain long-run economic growth.

Models of Schumpeterian creative destruction aim to explain

how entrepreneurs with new products displace incumbent producers.

models of creative destruction aim to explain

how entreprenuers with new products displace incumbent procedures

What happens if MPC is well above the growth rate?

indicating that the U.S. economy has a lower saving rate and less capital than it would have in the Golden Rule steady state.

Assume that an economy has labor-augmenting technological progress but that capital does not depreciate (δ = 0), and the population growth rate is n = 0. In order to maintain steady-state capital per effective worker of k*:

investment is necessary to provide additional capital in the amount of gk*.

If capital per effective worker is k = 5, K = 500, and L = 80, then E equals:

k = K / (E × L); 1.25.

An economy with a population growth rate of 3 percent and a rate of technological growth of 1 percent is in the steady state. If the capital-output ratio is 3, depreciation amounts to 12 percent of GDP, and capital income is 24 percent of GDP, then this economy would need to:

leave its savings rate alone because it is already at the Golden Rule point.

The U.S. economy has ______ capital than at the Golden Rule steady state, suggesting that it may be desirable to ___________ the rate of saving.

less, increase

The U.S. economy has _______ capital than at the Golden Rule steady state, suggesting that it may be desirable to __________ the saving rate

less, increase

The economy of the republic of Sardonica has a saving rate of s = 0.24, a depreciation rate of δ = 0.05, a population growth rate of n = 0.01, and a growth rate of effective labor of g = 0.02. The production function is y = k1/2. In Sardonica, the steady-state output per effective worker is:

sf(k*) = (δ + n + g)k* for k*, which is 0.24 × (k*)1/2 = (0.05 + 0.01 + 0.02)k*. 3

One economic reason for governments to decide on the allocation of saving to specific investment projects is that the private marginal returns of a project are:

substantially lower than its social marginal returns.

Recent studies have also found that

that international variation in standards of living is attributable to a combination of capital accumulation and the efficiency with which capital is used.

Policymakers can also promote economic growth by setting up

the appropriate legal and financial institutions to allocate resources efficiently, by supporting a culture conducive to growth, and by ensuring proper incentives to encourage research and technological progress.

In 2015, a country has a labor force of L = 100. The growth rate of labor-augmenting technological progress is g = 0.03. In 2016:

the average worker is as productive as 1.03 workers in 2015.

These models try to explain the decisions that determine

the creation of knowledge through research and development.

The model can explain much of what we see in

the data, such as balanced growth and conditional convergence.

In the steady state of the Solow growth model,Modern theories of endogenous growth attempt to explain

the rate of technological progress, which the Solow model takes as exogenous.

Modern theories of endogenous growth attempt to explain

the rate of technological progress, which the Solow model takes as exogenous.

In the steady state of the Solow Growth model, with technological progress, which variable is not constant

the real wage

In the steady state of the Solow model with technological progress, which of the following variables is not constant?

the real wage

The Solow growth model with technological progress predicts that, in the steady state, _____ grows at the rate of technological progress.

the real wage

In the U.S. economy, the net marginal product of capital is

well above the growth rate,

In the Solow model, with labor-augmenting technological progress and population growth, a decline in the rate of depreciation of capital because of favorable climate changes that slow the corrosion of materials _____ the steady-state capital per effective worker.

will increase

The purpose of _________ growth theory is to explain technological progress. Some of these models do so by questioning the Solow model's assumption of ____________ returns to capital.

endogenous, diminishing

When the private returns to research and development activities within a firm are 5 percent and the societal returns are 10 percent, private profit-maximizing firms:

engage in less research and development than they would if they earned the social return.

the Golden Rule (consumption-maximizing) steady state is characterized by

equality between the net marginal product of capital (MPK−δ) and the steady-state growth rate of total income (n+g).

In the steady state of the Solow growth model,Modern theories of endogenous growth attempt to explain?

explain the rate of technological progress, which the Solow model takes as exogenous.

The effective number of workers is the product of E and L. When E grows at rate of g = 0.05, and L grows at rate of n = 0.01, the effective number of workers grows at rate of:

g+n=0.06