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.