ECON 302 - Chapter 8

Solow's model assumes people save a fraction s of their income and consume a fraction, which is depicted as:

(1 - s)

The complete consumption function is:

c = (1 - s)y

The production function states that output depends on the capital stock and the labor force:

Y = F(K,L)

The equation showing amount of output per work as a function of the amount of capital per worker when z = 1/L:

Y/L = F(K/L, 1) 1 is constant

MPK is equal to:

f(k + 1) - f(k)

An economy begins with a level of steady-state capital per worker that is less than the Golden Rule level of capital per worker, and policymakers increase the saving rate to sgold. When the economy reaches the steady state again, consumption per worker will be _____ than its initial level, and investment per worker will be _____ than its initial level.

greater; more

y = (1 - s)y + i is equivalent to:

i = sy

The Solow growth model predicts that when the population growth rate drops from 0.02 to 0.01, capital per worker will _____ in steady state.

increase

When investment exceeds depreciation, the capital stock MOST likely will:

increase

The production function in Figure 8-1 in the text, y = f(k), implies that as k increases:

increases at a decreasing rate

Capital per worker:

k = K/L

If the production function is y = k1/2, s = 0.4, and δ = 0.05, then the steady-state level of capital per worker is _____ the Golden Rule level.

less than

If MPK > δ + n in the steady state, then the slope of the _____ is larger than the slope of break-even investment, and increasing the steady-state capital per worker will _____ consumption per worker.

production function; increase

If an economy begins with a level of steady-state capital that is less than the Golden Rule level of capital, then policymakers need to increase the _____ rate in order to guide the economy to the Golden Rule level of capital.

savings

If y = c + i, inserting the consumption makes the equation look like:

y = (1 - s)y + i

Output per worker:

y = Y/L

National income in per-worker terms:

y = c + i

Solow's model assumes that there are constant returns to scale, represented by:

zY = F(zK, zL) for any positive number z.