MACRO 313 EXAM 2

Assume there is some change in government policy that reduces the natural rate of unemployment 𝑢. How does this change affect output immediately? Over time?

Immediately, output increases because of the increase in labor in the production function; over time, the capital stock expands to accommodate additional workers, and output increases further.

What is endogenous growth theory?

Models of economic growth that try to explain the rate of technological change.

Why will the economy always reach a steady state in the solow growth model?

Over time, the capital stock will rise; it will continue to rise — along with output f(k) — until it approaches the steady state

What is the key determinant of the steady state?

Savings rate

What is the golden rule level of capital?

The steady-state value of k that maximizes consumption

What is the steady state income formula in the basic solow model?

𝑦∗=20(𝑘∗)13 the basic production function given but you add in the steady state capital stock as K.

growth rate does not change because of?

The savings rate.

What is the formula for break even investment? AKA steady state investment

(delta + n)*k

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. 1. What is the immediate impact on total output? 2. What is the immediate impact on output per person? 3. What happens subsequently to output per person in the postwar economy? 4. What happens to the growth rate of output per worker after the war but before the economy reaches a new steady state?

1. It decreases 2. It increases 3. It declines 4. It is less than zero

What happens when an economy goes above the golden rule steady state of capital?

Consumption is reduced and vice versa.

What is growth accounting?

An empirical method of decomposing the sources of growth with the aim of measuring the pace of technological progress.

What is the formula for steady state consumption in the solow population growth model?

C* = f(k*) - (g + n)*k*

In the Solow model with technological progress, capital's share of income is __________ and labor's share of income is _________? .

Constant; Constant

The MPK is the same as what in the Basic Solow Model?

The slope of the output line.

What is the formula for depreciation in the basic solow model?

DELTA = dep rate/capital stock

An increase in the population causes the capital stock per worker to?

Decline

A reduced savings rate causes capital stock and national income to?

Decrease

Below K*, investment ________ depreciation so capital stock grows. Above K*, investment ________ depreciation so capital stock shrinks.

Exceeds, is less than

The final Solow consumption function shows that?

Investment = savings

What two forces influence the capital stock?

Investment and depreciation

What does the steady state equation in the basic solow model show?

Investment per worker as a function of capital stock per worker.

What does the steady state equation add to the basic solow model?

Investment, savings, and eventually depreciation.

As K increases in the solow model, what happens to GDP?

It also increases but at a slower rate due to the law of diminishing returns.

An increase in the saving rate raises investment which in turn does what to the capital stock?

It forces it to grow towards a new steady state.

If capital stock increases in the solow model, what has happened to GDP?

It is also increasing

Which country has the highest income per person? (GDP per person?)

The U.S.A.

What is L X E

The effective number of workers

Where is the steady state level of capital per worker in the solow model? (Shown as k*)

The point on the graph where investment and depreciation intersect.

The output between consumption and investment is determined by?

The savings rate

What is the production function in per worker terms for the Basic Solow Model?

Y= F(K)

What is the production function in the solow model with tech growth?

Y= F(K, L x E)

Which of the following is the best representation of break-even investment (the amount of investment needed to keep capital per effective worker constant)?

[𝛿+𝑛+𝑔(𝑢)]𝑘

What happens to the production function in the solow model when the amount of capital increases?

it becomes flatter because it exhibits the diminishing marginal product of capital.

What is g in the model with tech progress?

labor augmenting technological progress

What is the formula for steady state consumption in the model with tech progress?

c*= f(k*) - (delta + n + g)*k*

What is the consumption per worker formula in the basic solow model?

c*= y* - sy which becomes (1-s)y*

What is the golden rule for steady state consumption in the basic Solow Model?

c= y - i which becomes c = f(k) - g(k)

What does the Solow Model show?

how saving, population growth, and technological progress affect the level of an economy's output and its growth over time.

What is the investment per worker as a function of capital stock per worker for the basic solow model in the steady state?

i = sf (k) and when you add depreciation it becomes: change in k = sf(k) - gk (g being depreciation)

What is the relationship between unemployment and output?

negative. as unemployment rises, output declines.

What is the formula for change in capital per worker in the model with tech progress?

sf(k) - (delta + n + g)*k

What is the formula for change in capital stock in the solow population growth model?

sf(k) - (delta + n) * k

What is the steady state condition formula in the basic solow model?

sy* = δk*

What is the golden rule level of capital?

the level of capital associated with the saving rate that yields the highest level of consumption in steady state

What is steady state consumption?

what's left of steady-state output after paying for steady-state depreciation.

What is the national income per worker formula in the Basic Solow Model?

y= c + i which becomes c= (1 - s)*y and can be reduced to i = sy

What is the formula for the change in capital stock in the basic solow model?

Δk = i - δk = sy - δk

What is the best representation of the production function for manufactured goods in terms of output per effective worker and capital per effective worker?

𝑦=𝐹[𝑘,(1−𝑢)]