Chapter 8 Capital Accumulation

The steady -state level of capital occurs when the change in the capital stock per worker (K^ ) equals:

0

y=k^1/2 prime prime there is no population growth or technological progress5 percent of capital depreciates each year, and a count saves 20 percent of output each year, then the steady-state level of capital per worker is

16

From 1946 to 1972, output per person grew at a rate of about 2 percent per year in the United States and about _____ percent per year in Japan.

8

steady state

A condition in which key variables are not changing. investment is just enough to cover depreciation then capital per worker will remain constant

Solow growth model

A model that shows how saving, population growth, and technological progress determine the level of and growth in the standard of living.

The Solow growth model assumes that the production function has _____ returns to scale.

Constant

Economic growth theory tries to explain the reasons that income per capita varies across _____ and over time.

Countries

Assume that a war reduces a country's labor force but does not directly affect its capital stockIf the economy was in state before the war and the saving rate does not change after the war, then, over time, capital per worker will and per will as it to the steady state

Decline; Decrease

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

Fall : Fall

In the Solow model , if the economy starts with more capital per worker than the steady -state level of capital per worker then the capital per worker will and the output per worker will as the economy approaches steady state.

Fall:Fall

the per worker production function for an economy is given by y = k the saving rate is 0.3, the depreciation rate is and output and the economy starts off with 25 units of capital per worker, then the capital per worker will worker will as the economy approaches the steady state

Fall:Fall

What are the two ways to determine the Golden Rule level of the capital stock?

Find the capital stock at which steady-state consumption is maximized, and find the capital stock at which the net marginal product of capital equals zero.

when the economy is in the steady state and the saving rate increases, investment exceeds depreciation, and the economy moves to a new steady state with _____ capital per worker.

Higher

An increase in the savings rate leads to

Higher output in the long run. faster growth temporarily. But not faster steady-state growth

cause(s) the capital stock to rise, while cause(s) the capital stock to fall.

Investment ; depreciation

Capital Accumulation

Investment increases the capital stock; depreciation reduces it. Change in capital stock = investment - depreciation

In the Solow model, demand consists of consumption and _____; government purchases and net exports are ignored.

Investments

When the depreciation rate is constant, as in the Solow model, an economy with more capital per worker has to invest _____ a country with a lower k in order to keep constant its stock of capital per worker.

More than

When an economy's capital is below the Golden Rule level, reaching the Golden Rule level

Require initially reducing consumption to increase consumption in the future

When an economy begins above the Golden Rule level, reaching the Golden Rule level

Results in a higher consumption at all times in the future

The Solow model shows that a key determinant of the steady-state ratio of capital to labor is the:

Saving rate

Savings Rate

The Solow growth model assumes that per-worker consumption c is a fraction (1 − s) of per-worker income y. The constant s is the:

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

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

he formula for steady-state consumption per worker (c ^ x) as a function of output per worker and investment per worker is

c*= f(k*) - sk*

The consumption function in the Solow model assumes that society saves a

constant proportion of income

If an economy has achieved the Golden Rule steady state, then:

consumption per worker cannot be increased.

Suppose the economy is originally at a steady state where the marginal product of capital is less than the depreciation rat 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

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 greater than its initial level, investment per worker will be _____ than its initial level, and the MPK will be _____ than its initial level.

greater; less

Anything that affects the long-run rate of economic growth - even by a tiny amount- will have huge effects on what?

living standards in the long run

Suppose that an economy is in its steady state and the capital stock is above the Golden Rule level. Assuming that there no population growth or technological changeif the saving rate falls:

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

The national income identity is

production equals consumption plus investment

In the Solow growth model, the assumption of constant returns to scale means that:

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

Savings Rate slide definition

savings per worker is defined as savings per worker times production per worker

If an economy is in a steady state with no population growth or technological change and the marginal product of capital i less than the depreciation rate

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 tha output will grow and that the new steady state will approach:

the same level of output per person as before

Golden Rule level of capital

the steady state in which consumption per worker (or consumption per effective unit of labor) is maximized. it requires policymakers to adjust savings

German and Japanese output per person increased rapidly after World War II because:

they maintained high rates of saving, leading to rapid capital accumulation.