Macro Mid term 2

Who proposed the concept of "creative destruction"? What does this concept mean

Schumpeter proposed the theory of creative destruction, which states economic progress results from new product producers driving incumbent producers out of business.

Assume that two economies are identical in every way except that one has a higher population growth rate.According to the Solow growth model, in the steady state, the country with the higher population growth rate will have a _____ level of output per person and _____ rate of growth of output per worker compared to the country with the lower population growth rate

lower; the same

According to the Kremerian model, large populations improve living standards because:

there are more people who can make discoveries and contribute to innovation

In the Solow growth model, where s is the saving rate, y is output per worker, and i is investment per worker, consumption per worker (c) equals:

(1 - s)y

In the Solow model with population growth and technological progress, an economy's total output grows by5 percent in the steady state and technology grows by 2 percent. Therefore, we can conclude that the population growth rate is

3 percent

In the Solow growth model, the steady state occurs when:

capital per worker is constant

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

constant proportion of income

In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes:

consumption per effective worker

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

decline; decrease

An increase in the rate of population growth with no change in the saving rate:

decreases the steady-state level of capital per worker.

The efficiency of labor:

depends on the knowledge, health, and skills of labor

In the Solow model with technological progress, the steady-state growth rate of output per effective worker is

g

In the Solow growth model, with a given production function, depreciation rate, saving rate, and no technological change, higher rates of population growth produce higher steady-state:

growth rates of total output

Examination of recent data for many countries shows that countries with high saving rates generally have high levels of output per person because:

high saving rates lead to high levels of capital per worker

In the Solow growth model, if investment exceeds depreciation, the capital stock will _____, and output will_____ until the steady state is attained

increase; increase

With a per-worker production function(y=k^1/2) ,the steady-state capital stock per worker (k*) as a function of the saving rate (s) is given by

k*=(s/)2

In the Solow growth model of an economy with population growth but no technological change, if population grows at rate n, then capital in the steady state grows at rate _____, and output grows at rate _____ in the steady state.

n;n

In the Solow growth model, for any given capital stock, the _____ determines how much output the economy produces, and the _____ determines the allocation of output between consumption and investment

production function; saving rate

In the Solow growth model, investment equals

saving

The rate of labor-augmenting technological progress (g) is the growth rate of

the efficiency of labor

In the Solow model with population growth and technological progress, an economy's output per worker grows at 3 percent and the total output grows at 5 percent. Therefore, we can conclude that the technology is growing by _____ and the population is growing by _____

3;2

If the per-worker production function is given by y = k1/2, the saving ratio is 0.3, and the depreciation rate is0.1, then the steady-state ratio of capital to labor is

9

Consider the Solow model with population growth and no technological progress with production functionY = K1/2L1/2. If the total capital per worker in year 1 is 9 units, the population growth rate is 1 percent, depreciation rate is 9 percent, and saving rate is 40 percent, then the capital per worker at the beginning of year 2 will be _____ units

9.3

Which of these statements is NOT true about the creation of knowledge and the process of research and development? a)Knowledge is a private good, that is, rival and excludable b)Much of the research and development is done by firms driven by the profit motive. c)Patents provide firms with monopoly power that makes research profitable. d)Most innovations build on previous innovations.

Knowledge is a private good, that is, rival and excludable.

Larger quantities of steady-state capital have both a positive effect and a negative effect on consumption per worker in the Solow model (assuming no population growth or technological progress). Explain

Larger quantities of steady-state capital increase the capital-per-worker ratio and increase the quantity of output, and, therefore, a greater quantity of output is available for consumption per worker. Large quantities of steady-state capital generate more depreciation, which must be replaced from output in order to maintain the steady state, thus reducing the amount of output available for consumption per worker

Explain the effect of saving in the steady state in the Solow model with no technological progress and nopopulation growth.

Saving supplies the investment to replace the depreciating capital to equip the workers with the same amount of capital so that the steady-state capital-worker ratio does not change

The initial steady-state level of capital per worker in Macroland is 5. The Golden Rule level of capital perworker in Macroland is 8.a. What must change in Macroland to achieve the Golden Rule steady state?b.Why might the Golden Rule steady state be preferred to the initial steady state?c. Why might some current workers in Macroland prefer the initial steady state to the GoldenRule steady state?

The saving rate in Macroland must be increased to achieve the higher capital per worker ratio of the Golden Rule steady state. b. Consumption per worker is higher in the Golden Rule steady state than in the initial steady state. c. In the transition from the initial steady state to the Golden Rule steady state, the level of consumption per worker must initially decrease to accumulate the additional capital required for the Golden Rule steady state.Thus, workers who do not want to sacrifice current consumption for future consumption may prefer the initial steady state

When does steady state occur?

When the economy finds itself at the level of capital stock where the amount of investment equals the amount of depreciation, the capital stock will not change. So, the capital stock and output are steady over time rather than growing or shrinking. This is called the steady-state level of capital

In the Solow model with population growth and labor-augmenting technological progress, there is sustained economic growth because:

a rise in the number of effective workers offsets the diminishing marginal product of capital

The economies of two countries, East and South, have the same production functions, depreciation rates, and saving rates. The economies of each country can be described by the Solow growth model with population growth but no technological progress. Population growth is faster in South than in East. a. In which country is the level of steady-state output per worker larger? Explain. b. In which country is the steady-state growth rate of output per worker larger? c. In which country is the growth rate of steady-state total output greater?

a. East will have a higher level of steady-state output per worker because the population growth is faster inSouth. The same saving in both countries means that investment in both countries will be the same. However, capital will be spread more thinly per worker in South, where the population is growing more rapidly. Given the same production functions, output per worker will be higher in East because it has a higher capital per worker ratio than South. b. In the steady state in both countries, capital per worker is constant, so output per worker is constant. Thegrowth rate of output per worker is zero in both East and South. c. In the steady state, total output grows at the rate of population growth. Since South has a higher rate ofpopulation growth, the growth rate of total output will be higher in South than in East

Consider two countries that are otherwise identical (they have the same saving rates and depreciation rates),but the population of Country Large is 100 million, while the population of Country Small is 10 million. Use the Solow model with no technological change to compare the steady-state levels of output per worker if: a. the population growth rates are the same in the two countries. b. the population growth rate is higher in Country Large.

a. The steady-state levels of output per worker will be the same in both countries because the assumption of constant returns to scale means that the absolute size of the economy, measured by number of workers, does not affect output per person .b. The steady-state level of output per worker will be lower in Country Large because with the same saving rate but a faster growing population, Country Large will not be able to maintain a capital-per-worker ratio as high as that of Country Small.

Suppose the economy is originally at a steady state where the marginal product of capital is equal to thedepreciation rate. If the saving rate of the economy increases, then at the new steady state

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

If an economy moves from a steady state with positive population growth to a zero-population growth rate, then in the new steady state, total output growth will be _____, and growth of output per person will be _____.

lower; the same as it was before

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 decreasebut finally approach a level above its initial state

In a steady-state economy with a saving rate s, population growth n, depreciation rate , and labor-augmenting technological progress g, the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f (k*)), is

sf (k) / ( + n + g)

How does population growth help explain why some countries are poor and some are rich?

An increase in the rate of population growth reduces the steady-state level of capital per worker. The Solowmodel assumes that countries with higher population growth will have lower levels of GDP per person andtherefore lower incomes—and vice versa

In the Solow growth model with population growth and labor-augmenting technological change, the break-even level of investment must cover:

depreciating capital, capital for new workers, and capital for new effective workers

Assume that a war reduces a country's labor force but does not directly affect its capital stock. Then theimmediate impact will be that:

total output will fall, but output per worker will rise