Chapter 8

Graph

Graph

The steady-state level of capital occurs when the change in the capital stock per worker (Δk) equals: the population growth rate the depreciation rate 0 the saving rate

0

In the discussion of German and Japanese postwar growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly affect the capital stock but that casualties reduce the labor force. Assume that the economy was in a steady state before the war, that the saving rate is unchanged, and that the rate of population growth is the same as before the war. a. What is the immediate impact on total output? [ Select ] ["It stays the same.", "It increases.", "It decreases."] b. What is the immediate impact on output per person? [ Select ] ["It decreases.", "It stays the same.", "It increases."] c. What happens subsequently to output per person in the postwar economy? [ Select ] ["It declines.", "It rises."] d. What happens to the growth rate of output per worker after the war but before the economy reaches a new steady state? [ Select ] ["It is greater than zero.", "It is less than zero."]

A: it decreases B: It increases C: It declines D: It is less than zero

Suppose the steady-state capital stock is initially below the Golden Rule level. Use the Solow growth model to assess the following claim: "Devoting a larger share of national output to investment would help restore rapid productivity growth and rising living standards." a. Productivity growth will initially [ Select ] ["rise", "fall", "remain unchanged"] and [ Select ] ["return to its initial level", "rise to a higher level", "fall to a lower level"] as the economy achieves a new steady state. b. Living standards will initially [ Select ] ["remain unchanged", "fall", "rise"] and [ Select ] ["return to its initial level", "fall to a lower level", "rise to a higher level"] as the economy achieves a new steady state.

A: rise; return to its initial level B: fall; rise to a higher level

Consider Swan Island, an economy described by the Solow model. There is no population growth or technological progress. The production function is y=20k13. The initial capital stock per worker is 125. According to the national income accounts, investment equals 18 percent of national income, and depreciation equals 12.5 percent of national income. Calculate the following: a. National income: y= b. Consumption: c= c. Saving rate: = d. Depreciation: δk= e. Depreciation rate: δ= f. Change in the capital stock in the next period: Δk= g. Steady-state capital stock: k*= h. Steady-state income: y*=

A=100 B=82 C=.18 D=12.5 E=0.1 F=5.5 G=216 H=120

The consumption function in the Solow model assumes that society saves a: smaller proportion of income as it becomes richer larger proportion of income as it becomes richer constant proportion of income larger proportion of income when the interest rate is higher

constant proportion of income

Suppose the economy is originally at a steady state where the marginal product of capital is less than the depreciation rate. If the saving rate of the economy changes to a rate consistent with the golden rule level of capital, then at the new steady state consumption per worker will be higher compared to the original steady state. output per worker will be higher compared to the original steady state. investment per worker will be higher compared to the original steady state. capital per worker will be higher compared to the original steady state.

consumption per worker will be higher compared to the original steady state. output per worker will be higher compared to the original steady state.

Suppose that an economy is in its steady state and the capital stock is above the Golden Rule level. Assuming that there are no population growth or technological change, if the saving rate falls: output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state. output, consumption, investment, and depreciation will all decrease. output and investment will decrease, and consumption and depreciation will increase and then decrease but finally approach levels above their initial state. output and investment will decrease, and consumption and depreciation will increase.

output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.

When an economy's capital is below the Golden Rule level, reaching the Golden Rule level: produces lower consumption at all times in the future. requires higher consumption levels at all times. requires initially increasing consumption to decrease consumption in the future. requires initially reducing consumption to increase consumption in the future.

requires initially reducing consumption to increase consumption in the future.

In the Solow growth model, the assumption of constant returns to scale means that: all economies have the same amount of capital per worker the saving rate equals the constant rate of depreciation the number of workers in an economy does not affect the relationship between output per worker and capital per worker the steady-state level of output is constant, regardless of the number of workers

the number of workers in an economy does not affect the relationship between output per worker and capital per worker

Which of these statements is NOT true about the steady state of the basic Solow model? The investment per worker is always equal to the depreciation per worker. The saving and consumption per worker are constant. The marginal product of capital always is equal to the depreciation rate. The capital per worker and output per worker are constant.

The marginal product of capital always is equal to the depreciation rate.

If the per worker production function for an economy is given by y = k1/2, the saving rate is 0.3, the depreciation rate is 10%, and the economy starts off with 25 units of capital per worker, then the capital per worker will _____ and output per worker will _____ as the economy approaches the steady state. fall; fall fall; rise rise; rise rise; fall

fall; fall

Suppose an economy is at its steady-state equilibrium and there is a permanent reduction in the saving rate of the economy. In this case, as the economy approaches its new steady state, capital per worker will _____ and output per worker will _____. rise; fall fall; rise fall; fall rise; rise

fall; fall

The Solow model shows that a key determinant of the steady-state ratio of capital to labor is the: labor force level of output saving rate capital elasticity in the production function

saving rate

If an economy is in a steady state with no population growth or technological change and the marginal product of capital is less than the depreciation rate: steady-state consumption per worker would be higher in a steady state with a higher saving rate. the economy is following the Golden Rule. steady-state consumption per worker would be higher in a steady state with a lower saving rate. the depreciation rate should be decreased to achieve the Golden Rule level of consumption per worker.

steady-state consumption per worker would be higher in a steady state with a lower saving rate.

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts that output will grow and that the new steady state will approach: a lower level of output per person than before. the same level of output per person as before. a higher level of output per person than before. the Golden Rule level of output per person.

the same level of output per person as before.