E302 Exam #2 Review
In Solow growth model, what are the steady state effects of an increase in the savings rate?
A higher savings rate can shift up your savings curve, however, it won't keep increasing per capita GDP in the long-run
Solow ends up with "1+n" in his capital accumulation equation because...
Dividing K' by N isn't really future per-capita capital. That's K'/N' so he divides K' by N'/(1+n) (=N) and all current variables by N
In the Solow growth model (chapter 7), a decrease in the savings rate(s)...
Does not shift the production function
Review - What would happen if szf(k*) > (n+d)k* in the Solow exogenous growth model?
The per-capita capital stock and the level of per-capita depreciation would accumulate
What would happen if szf(k*) > (n+d)k* in the Solow exogenous growth model?
The per-capita capital stock and the level of per-capita depreciation would accumulate szf(k*) represents capital inflow (n+d)k* represents capital outflow szf(k*)>(n+d)k* means that capital inflow is larger than outflow, so capital would accumulate Depreciation accumulates because depreciation per person = d*k, when there's more capital the amount of depreciation would increase
In the two sided search model
There are N consumers Q is the labor force j is the number of job openings relative to the number looking for jobs
The labor force participation rate was higher in 2012 than in 1948 because
the participation rate of women rose during that time period Total labor force participation rates increased over this period even though male labor force participation rates have trended downward since the 1950's (this is the "missing men" issue that was discussed in class)
True or false Change in growth rate of "z" would affect the growth rate of consumption? And only change in "z" would only affect the level of consumption?
True
An increase in the UI benefit "b" could result in such a large increase in the number searching for work that GDP rises...
True Because if more are searching then the odds of matching are higher and GDP can rise
A change in the unemployment rate at any given level of vacancy rate is a shift in the Beveridge Curve
True Holding one axis constant and changing the other is a shift in the curve If "e" changes that affects "j", so unemployment is affected. It does not affect the vacancy rate, as the changes in "e" and 1/j move in opposite directions so e(1/j,1) = constant (assuming "e" is the only thing that has changed and there's no change in either "k" or match surplus). That is why a change in "e" shifts the Beveridge curve (it doesn't affect "v", but does affect "u")
Holding match efficiency "e" constant, the household matching function moves in the opposite direction from the firm's
True Matching probability is em(1,j) for the household but em(1/j,1) for the firm The number of workers and vacancies is not the same (j=A/Q might not be equal to one) Therefore the odds of a firm matching are not the same as the odds of a worker matching. The odds of a firm matching is determined endogenously by entry/exit of firm (A), and the odds of a worker matching is also determined inside the model by the decision to enter the labor force (Q). A and Q together will determine j
When using the 2-sided search model, always start in the lower panel (the firm labor demand) to first find j
True Once we know j = A/Q you can dot up to the labor supply graph and find Q. If you know j and Q you'd also be able to infer A (job openings)
What characteristics do both human and physical capital share?
current costs are incurred for future benefits
In the endogenous growth model with human capital, spending more time on education
increases the growth rate, but would decrease the consumption in the current period
The matching function m(job searchers, job openings) captures the idea that
it is costly and time-consuming to get firms and workers to produce output The production function for the matching technology implies that worker-firm matches are endogenous (depend on the economic environment) rather than exogenous (automatic) the way they are assumed to be in "standard" efficient models
In Solow growth model, what are the steady state effects of an increase in the population growth rate?
A higher population growth rate country would have a lower level per-capita GDP than a low population growth country
A worker and a firm from a match if their match is better than outside options Outside options for worker rise if...
the unemployment benefit rises, there are lots of vacancies (j high), there are lots of better offers (higher w elsewhere)
When the ratio of job openings (vacancies) to job searchers is high, we say that labor markets are ________ and that it is relatively ______ for firms to increase production
tight; difficult It is difficult for firms to increase production, as it is more competitive to try and hire workers. This means it is more difficult for them to increase their production.
Assume there's a slowdown in the population growth rate "n" and that policymakers want to accelerate the path to the new golden rule level of the per capita capital stock. The best policy would most likely be...
to tax current consumption MPk = n+d at the golden rule. "n" has fallen so to get MPk to fall policymakers will choose a policy that will increase the per capita capital stock "k" and MPk to fall (diminishing returns)
McKinsey Global Institute forecasts that...
60% of US job growth over the next 10 years will take place in just 25 metropolitan areas
What are the seven economic growth factors?
1. Before the industrial revolution in about 1800, standards of living differed little over time and across countries 2. Since the Industrial Revolution, per capital income growth has been sustained in the richest countries. In the United States, average annual growth in per capital income has been about 2% since 1900 3. There is a positive correlation between the rate of investment and output per worker across countries 4. There is a negative correlation between the population growth rate and output per worker across countries 5. Differences in per capita incomes increased dramatically among countries of the world between 1800 and 1950, with the group widening between the countries of Western Europe, the United States, Canada, Australia, and New Zealand, as a group, and the rest of the world 6. There is essentially no correlation across countries between the level of output per capita in 1960 and the average rate of growth in output per capita for the years 1960-2007 7. Richer countries are much more alike in terms of rates of growth of real per capita income than are poor countries
Solow model demonstrates the pre-eminence of productivity gains in determining both capital accumulation and economic growth. An obvious extension of that model is that, barring impediments to trade or other types of market failures, all countries with access to the same technology should grow at the same rate over the long run (in per capita terms) The three goals of policy makers then should be to...
1. Encourage innovation with their policies 2. Increase access to foreign markets in order to increase access to foreign technologies through multinational corporations 3. Increase access to foreign markets in order to borrow from other countries to finance growth without sacrificing so much current consumption
How can a country overcome low productivity?
1. Governments can promote greater competition among firms. If monopoly power is not protected by governments, then firms have to develop and implement new technologies to remain competitive, this would increase productivity 2. Governments can promote free trade. Just as with greater domestic competition, greater competition among countries promotes innovation and the adoption of the best technologies. 3. Governments should privatize production where there is no good economic case for government ownership. Government ownership where it is unnecessary often leads to protection of employment at the expense of efficiency, and this tends to lower total factor productivity. 4. Governments can act to mitigate political corruption
In the two-sided search model, what are the effects of an increase in productivity?
1. Increases the total surplus from a match: z-b 2. Increases the wage, w, as the worker gets the same share of a larger pie 3. As profits are higher, posting vacancies becomes more attractive for firms, so labor market tightness, j, rises 4. For consumers, searching for work becomes more attractive, as the wage is higher, and the chances of finding work are better 5. ... u = 1-em(j,1) = decreases v = 1-em(1/j,1) = increases Q = rises (found on worker graph) M = em(j,1)Q = increases Y = zem(j,1)Q = increases w = az +(1-a)b = increases
In the two-sided search model, what are the effects of a decrease in matching efficiency?
1. No change in total surplus (z-b), or the wage [ az + (1-a)b] 2. Chances of finding a worker are lower, so fewer firms post vacancies and j falls 3. For consumers searching is less attractive - the wage is the same, but the chances of winding work are lower - so Q falls 4. unemployment (u) rises, but vacancy (v) stays the same 5. Y decreases 6. Decrease in match efficiency offers a potential explanation for the shift in the US Beveridge curve
Many critics of the CARES Act $600 subsidy to the UI benefit through the end of July feel that the high benefit contributed to the slow post-recession recovery. According to the Chapter 6 model, how does an increase in b (the unemployment insurance benefit) affect GDP?
1. Real wages increase, which causes firms to create fewer job openings 2. Workers get pickier, which reduces the probability of productive matches forming 3. More people search for jobs, which increases the probability of productive matches forming
In the two-sided search model, what are the effects of an increase in UI benefits?
1. Reduces total surplus from a match: z-b 2. Increases the wage, w, as the alternative to working becomes more tempting for searching consumer 3. Posting vacancies becomes less attractive for firms, so labor market tightness, j, falls 4. For consumers, searching for work becomes more attractive, this is due to the higher wage. But searching for work is also less attractive, as there is less of a chance of finding work (this is because the labor market tightness, j, has decreased) 5. Q (and Y) may rise or fall 6. unemployment (u) rises and vacancy (v) falls
What are the three sources of differences in productivity across countries?
1. Takes time for workers and managers to learn to use a new technology (learning by doing) 2. Productivity differences can persist across countries because of barriers to the adoption of new technology 3. The level of aggregate technology can differ across countries because of the efficiency with which factors of production are allocated across firms in the economy
What two factors affect the growth rate of income and consumption in the endogenous growth model?
1. The efficiency of human capital accumulation (b) 2. The allocation of labor time between goods production (work) and accumulation of human capital
Which of the following is true? 1. Unemployment is pro-cyclical and vacancies don't move over the business cycle 2. Unemployment and vacancies move in the same direction over the business cycle 3. Unemployment and vacancies move in opposite directions over the business cycle 4. Unemployment is countercyclical and vacancies don't move over the business cycle
3. Unemployment and vacancies move in opposite directions over the business cycle
Which of the following explanations for disparities in the standards of living between countries CANNOT be accounted for by the Solow growth model? A. Different consumer preferences B. Different savings rate C. Different access to technology D. Institutional differences
A. Differences in consumer preferences
Consider the two-sided search model. Which of the following is true about the firm in the model (in equilibrium)? A. The firm is indifferent between creating a job opening and exiting the market B. The firm is indifferent between matching and not matching C. The firm is indifferent between matching and exiting the market D. All of the above
A. The firm is indifferent between creating a job opening and exiting the market
In the steady state of the Solow growth model from class, how does output grow?
Aggregate output grows at a constant rate
In the two-sided search model, a new technology that reduces the cost of interviewing workers would result in...
An increase in the labor force participation rate Lower K would cause u = 1-em(j,1) = decreases v = 1-em(1/j,1) = increases M = em(j,1)Q = increases Y = zem(j,1)Q = increases w = az + (1-a)b = no change
Assume the Solow model from Chapter 7. If there is a decrease in the depreciation rate, which of the following statements is NOT true? A. Standards of living will increase B. Savings rate(s) will increase C. Growth rate of per capita GDP is the same at both steady states D. All of the above are true
B. Savings rate(s) will increase
Does either the Keynesian or standard two-sided search model solution satisfy the first welfare theorem?
Both models are based on imperfect information The social planner wouldn't have imperfect information and so would not choose the same equilibrium outcome. Or they could say the social planner would not need to spend time in search. Or they could say that it would be more efficient to instantly match and not search, therefore the search solution cannot be Pareto optimum.
Average number of years of female education is often considered a measure of H with inter-generational externalities because...
Both: - If women are educated it is more likely that the parents are reading to their kids and that the parents expect their kids to be educated - If women are educated it is more likely the case that all of society values education, so that it is a social norm
The BRICS
Brazil, Russia, India, China, and South Africa
Consider two identical countries, A and B, which differ only in their initial level of human capital, H. In particular, suppose country A starts with larger H. In the endogenous growth model, which of the following would be true? A. Country A has a faster growth rate of GDP than B B. Country B has a faster growth rate of GDP than A C. Both countries have the same growth rate of GDP D. We cannot say for sure which country has a higher growth rate of GDP
C. Both countries have the same growth rate of GDP This is about the Romer model, where the growth rate is determined by b(1-u) Human capital "H" would affect the level of per capita GDP, but it wouldn't affect the growth rate - this means the growth rates should be the same
Which of the following production functions is most similar to the one using the two-sided model? A. Y = z^a K B. Y = z C. Y = zN D. Y = 0.5lnK+0.5lnN
C. Y = zN
The Solow model differs from the Malthus model in that...
Capital grows and accumulates in the Solow model but the main capital stock in the Malthus model was land, which doesn't accumulate Both models had technology shocks. Malthus argued that though technology seemed like the answer to economic hardship, it really wasn't. Solow said that was true before the reign of capital, as land responds differently to technology shocks than capital does
Consider two countries, A and B, with identical TZP "z", savings rate "s", depreciation rate "d", and population growth rate "n". Suppose country A currently has a higher capital to labor ratio, k, than country B. According to the Solow model, which economy currently has a higher growth rate in per-capita GDP, y?
Country B would have a higher growth rate of y (GDP) The Solow model predicts that there would be convergence in levels of per capita GDP That is, in the long run, countries with lower "k" initially will catch up - All countries end with the same per capita GDP in the long run (prediction of Solow model) In this problem, the only difference is that country A has greater per capita capital stock - means that country A is more productive than B Solow model predicts that B will catch up, and that must mean that is has the higher growth rate - that would be the only way B could catch up
In the Solow Exogenous growth model, which of the following will affect the growth rate of aggregate consumption in the steady-state? A. Changes in the savings rate "s" B. Changes in the capital depreciation rate, "d" C. Changes in the TZP, "z" D. None of these
D. None of these The key to this question is that these changes are just one-time shock The one-time shock would lead to short-run effects on growth rates, but the effect would vanish in the long run The question wants you to predict what would happen to the growth rate in the "steady-state" Steady-state is a long-run thing - so the one-time shocks won't have a long-run impact It will change the level, but that change is one-time
Is the participation rate procyclical or countercyclical?
It is mildly procyclical
According to the language and theory from class, global economic growth has contributed to climate change, and climate change will also feedback and lead to increased global economic growth
False
An increase in UI benefit "b" looks exactly the same in the model as an increase in TFP "z"...
False Both shift the P(Q) function upward because both are good for workers, but an increase in z is also good for firms An increase in z raises the benefit of a match for a firm (so there's more entry and j increases) but an increase in "b" lowers the benefit of a match for a firm (so there's less entry and j falls). What is true is that P(Q) rises in both cases.
In the Keynesian version of the model, a high wage results in a shift up of P(Q) and an increase in j(A/Q)...
False P(Q) increases from a higher match payoff for the worker, but that's a lower match payoff for the firm so there are less entry j falls
Unlike the Malthus model, in the Solow model a reduction in population growth has no impact on the standard of living...
False Standards of living is negatively affected by population growth in Solow, but per-capita growth rates in standards of living are not It is important to distinguish between level affects from growth rates in Solow. The graphs show level effects, so a decrease in "n" shows an increase in the level of per-capita capital stock (and therefore in per-capita GDP). To see changes in growth rates in the graphs, something has to repeatedly shift the curves so that levels are repeatedly increasing
China's per-capita GDP growth is more than 6 times as high as that in the US. China is doing better than the US...
False Their per-capita GDP levels are lower than in the US and their growth rates are higher in order to catch up Although China is growing 6 times faster, people prefer a higher standard of living (at least that is an assumption in our utility functions), so the country that is doing better in a utility sense is the one with the higher level. The US wants to keep growing though because we do want our high levels to keep increasing!
In equilibrium, we are at a constant level of the capital stock and we don't have to save anymore...
False We still have to replace depreciated capital and GDP has to keep up with population growth to maintain living standards This is a "bathtub" model. In equilibrium per capita GDP levels and per capita capital stock levels are maintained only by constant contributions (savings to compensate for reductions) balancing out the outflows (through depreciation and rising populations causing resources to be spread across more people)
As the cost of posting a vacancy increases, job openings per worker tends to increase
False em(1/j,1) = k/(1-a)(z-b) so as K rises j must fall
Why is convergence an implication of the Solow growth model?
GDP growth is determined by TFP, which is mobile internationally (remember technology is non-rival)
Investment in "_______" has an inter-generational externality, which means that current generations are benefiting from decisions made by previous generations.
H
In the two-sided search model, what is something that wouldn't increase a searcher's chances of finding a job?
Higher real wages
Is human capital rival or non-rival? Why would this matter?
Human capital is non-rival, meaning accumulation by one country doesn't affect that of another
If countries are initially identical, except with respect to levels of capital per worker, what does the Solow model predict will happen to these countries in the long run? Is it consistent with the data?
Identical countries should both converge to the same levels of capital per capita and income per capita. Those starting with a low amount of capital per capita should grow more rapidly than countries with higher amounts of capital per capita. The Solow growth model predicts that both countries will converge to the same level of capital per worker and output per worker (which means that the poor country will catch up to the rich country with regard to living standards). However, this prediction by the Solow model conflicts with actual growth experiences
What are the characteristics of a steady-state in the Solow growth model?
In a steady state, all variables stay constant; per capita capital, output, consumption, savings. Both Malthusian model and Solow model both have the property that the economy converges to a single steady state
What is the unemployment bathtub model?
In equilibrium, the people entering the labor force to find jobs (searchers) is equal to the people that find matches
What is the difference between exogenous growth and endogenous growth?
In exogenous growth models, growth is caused in the model by forces not explained by the model itself Endogenous growth models examine the economic factors that cause growth The Solow Growth model is an exogenous growth model, in that growth is caused in the model by forces that are not explained by the model itself To gain deeper understanding of economic growth, it is useful to examine the economic factors that cause growth, and this is done with endogenous growth models (Romer is an endogenous model)
If the government could increase the rate of growth of consumption, should it? Why or why not?
In the Romer model, increasing the rate of growth for consumption means that you must increase your human capital. It is important to note that this usually means giving up consumption in the short run to increase human capital in the long run. Poor countries might find it difficult to make this short-run sacrifice for the long run benefit
In what sense does the Solow growth model give optimistic conclusions about the prospects for improvement in the standard of living, relative to the Malthusian model?
In the long run the sustainable increase in the standard of living can be possible by ever-increasing total factory productivity (z) Unlike the Malthusian model, the increase in total factor productivity is not offset by the increase in population. These two factors combined make the Solow model much more optimistic than the Malthusian model
What causes economic growth in the endogenous growth model?
Investment into human capital is what causes growth in the Romer model
US Fed considering raising interest rates. How would this impact emerging market economies? Will it impact their current welfare? Will it affect their future welfare?
It can impact them in different ways: 1. Could take emerging market longer to repay, which will reduce the net payoff from their investment and reduce their future welfare accordingly but does NOT affect their growth path and not their current welfare 2. They may also borrow less, which will lower their growth path and reduce their future welfare throughout the path but not the current welfare
Openness to international trade is though to be so highly correlated with GDP growth because...
It increases competition, increases monopoly profits to firms because they sell to a broader market, increases knowledge transfer
What explains the observed Beveridge relation from 2000-2012?
It shifted to the right There was a decrease in matching efficiency as firm began searching This was because they were seeking skills that were in lower supply in the labor force
In the two-sided search model, what determines a firm's decision to post a vacancy?
K / (1-a)(z-b) The lower this ratio, the tighter the labor market will be
How has the labor force participation rate behaved over time? Do women and men behave similarly with respect to labor force participation?
Labor force participation increased from 59% in 1940 to 67% in 2000. However since then it has decreased to 64%. Women and men's participation in the labor force has gone in opposite directions. Women's participation increased (until recently) while men's participation has been decreasing for a while.
What are the long-run regularities in the behavior of the unemployment rate?
Long-run unemployment is determined by a number of factors (unemployment insurance, tax system, demographic factors, etc.)
All of the following are ALWAYS true for steady state capital per worker, except: A. k' = k B. MPk = n+d C. szf(k) = (n+d)k D. (1-s)zf(k) = c
MPk = n+d
Golden rule savings rate (formula)
MPk = n+d
Economics came to be known as the "dismal science" because
Malthus and others predicted that the agricultural revolution and other scientific advances would never improve standards of living
The idea that people must take time to search and find a match is considered a....
Market friction
Is there convergence in the levels and rates of growth of per capita income in the endogenous growth model? Why or why not?
No There isn't convergence because the "history" of investing in human capital matters. Countries that get to the same level of investment but haven't been investing as long won't be able to catch up to the other countries, this means they would need to be growing at a faster rate to be able to converge.
In the two-sided search model, a minimum wage set below the market wage will result in...
No change in the unemployment rate There is no effect on anything in the model if the minimum wage is below the market equilibrium level
Assume there's a slowdown in the population growth rate "n" and that policymakers want to accelerate the path to the new golden rule level of the per capita capital stock. The best policy for that would be...
One that encourages savings MPk = n+d n+d decreases here, which means policy makers would like MPk to decrease This would be down by increasing "k" quickly (diminishing returns when "k" increases, meaning MPk decreases as "k" gets higher)
When there is an increase in the unemployment insurance (UI) benefit (b)...
P(Q) shifts up as payoff from search rises. Firm share of surplus falls and there is less entry of firms so j=A/Q (market tightness) falls The payoff from search rises because workers are better off if they get a job (they get more of the match surplus (z-b) if their outside options are higher, and their outside options are higher if the UI benefit b is higher) and they are better off if they don't get a job (they get a higher UI benefit (b))
If goods, services, ideas, and money can flow freely across national borders, then all other things being equal we should expect that, in per capita terms...
Poor countries will have a higher marginal productivity of capital than rich countries If countries have the same "z", then differences in per capital GDP must result from differences in per-capita "K". If per-capita "K" is lower, then diminishing returns implies that MPk is higher, so a poor country with low K has high MPk
In the two-sided search model a business cycle caused by productivity shocks will cause
Pro-cyclically move: - Job openings (v) = 1-em(1/j,1) - Employment (M) = em(1,j)Q - Output (Y) = zem(1,j)Q - Real wages (w) = az + (1-a)b Counter-cyclically move: - Unemployment (u) = 1-em(1,j) The two-sided search model adds to the model from Chapter 4-5 in that it explains pro-cyclical job-creation as well as counter-cyclical unemployment
How does the determination of wages differ between the Keynesian version of search friction model and the standard two-sided search model
Rather than assuming Nash bargaining, in the Keynesian model, the wage is determined by mutual expectations about the economy - those expectations can be for either high or low wages
The US Department of Labor's website describes the Registered Apprentice program. How might the program be expected to affect labor markets?
Shift the Beveridge Curve down and to the left
The Asian Tigers
Singapore, Hong Kong, South Korea, Taiwan
In Solow's growth model, is technology (TFP or z) rival or non-rival? Why would this matter?
Technology is non-rival in the Solow model This means not competing with each other in terms of standards of living because of access to this input
Standards of living were about the same everywhere in the world until about 1620. This means that...
Technology was different in different countries, but better tech (more GDP) just meant more people to share the wealth
What does it mean to say that a good is non-rival?
That ownership by one doesn't affect or limit ownership by another
Did the Beveridge Curve shift during 2009-2012?
The Beveridge Curve shifted to the right during this time period, as firms found it more difficult to hire the workers they needed This is due to the rise of technology and a mismatch between the firm's demands and the skills supplied by the workers. Job opening rate = "vacancies"
What does the Beveridge Curve show? Statistically, what are economists referring to when they talk about the post Great Recession shift in the Beveridge Curve?
The Beveridge curve plots the relationship between the job openings rate (vacancy rate) and the unemployment rate. The unemployment rate is now higher at every job openings rate, which would show the Beveridge Curve shifting to the right
Was Malthus right? Why or why not?
The Malthusian model for pre-Industrial Revolution model is: GDP = f(z,K,Land, N) Given what was known in 1798, when Malthus wrote his essay, the Malthusian model would have been judged as successful However, we now know that Malthus was too pessimistic. He didn't account for the ability of the capital stock to increase. Also, while higher standards of living reduces deaths the birth rate also decreases
What does the Solow residual measure, and what are its empirical properties?
The Solow residual measures the total factor productivity. The main empirical property of it is that there are cyclical fluctuations in Solow residuals about trend growth
If the labor force participation rate drops to accommodate more time in education, then in the Romer model...
The consumption path shifts down but gets steeper
What are the effects of the minimum wage that is above the Nash-bargaining wage in terms of the aggregate production?
The effect on production is ambiguous
In the two-sided search model, when a worker and firm are matched, what determines the wage paid to the worker?
The equilibrium bargaining solution is the Nash bargaining solution (no regrets) a = worker's share of total surplus ("bargaining power") w = az + (1-a)b [This is why firm surplus (z-w) = (1-a)(z-b)]
In the two-sided search model, what determines a consumer's decision to search for work?
The expected payoff of searching P(Q) = b + em(j,1)a(z-b)
The golden-rule savings rate...
The optimal "s" that maximizes steady-state per capita consumption
How does the employment/population ratio behave relative to the participation ratio?
The participation ratio rate changes during business cycles, but less than the unemployment rate The participation rate is procyclical and the unemployment rate is countercyclical
How is the Solow model consistent with evidence on convergence across countries?
There is considerable evidence that many countries don't appear to be converging If the Solow model is correct, then there must be considerable differences in technology across countries In the steady-state the poor, middle income, and rich countries have levels of capital per worker kp*, km*, kr* respectively, so that output per worker in the steady state is ranked according to poor, middle income, and rich (ascending order). We see that in the steady-state, standards of living are permanently different in the three countries, but aggregate output grows at the same rate. Thus, the Solow model can explain disparities across countries in per capita income, if there are factors that cause aggregate total factor productivity to differ across countries.
When we compare rich and poor countries in the world...
There is much greater dispersion in growth rates in per capita income among the poor countries than among the rich ones Although rich countries all have pretty similar institutions as we as similar standards of living, the rest of the world has a lot of variety with some countries seeming to converge toward the rich while other are not
With an increase in population growth rate in the Solow growth model...
There's is a decrease in the golden rule savings rate and a decrease in output per worker
According to the assumptions of the Chapter 8 endogenous growth model, would an educated worker prefer to live in a country with other highly-educated people or in a country where most other people are not highly educated?
They would prefer to live in the country with high education levels. Consumption depends on aggregate human capital, and so the educated person would prefer to live in the more efficient high-output country. The model implication is that everyone would always prefer to live in the country that has accumulated high levels of human capital.
China offered US firms incentives to move to China to produce goods using US technologies...
This is a way to transfer TFP to China and helped foster rapid economic growth there US companies gained by moving to a lower per-capita capital stock region that therefore had high marginal productivity of capital FYI: Moving a company to another country, or having a more than 10% stake in a foreign-based company generally, is known as "Foreign Direct Investment" of "FDI". China attracted huge amounts of FDI into coastal cities in order to learn from successful US firms -- management skills, profit-maximization, adapting to market conditions, etc -- as those zones transitioned to market-based systems
The US has a very low savings rate but a relatively high rate of Investment and capital accumulation...
This isn't something we can explain by using a closed economy model like the Solow graph where all K accumulation comes from domestic savings This is explained by inflows of foreign savings into the US, which has good institutions, rule of law, and political/economic stability
The idea that an improvement in aggregate technology causes an increase in population but causes no increase in the average standard of living relates to this 18th-century economist...
Thomas Malthus
Why do the economists interviewed agree with the initial intent of the CARES Act that the unemployed should get a larger than usual benefit during the pandemic?
To protect the financial system
In the Solow growth model, what are the steady state effects of an increase in total factor producivity?
Total factor productivity growth is the only variables which can lead to long term growth szf(k*) must repeatedly shift up or (n+d)k* must repeated shift down for k* to fuel per capita GDP growth - only an increasing z can do this indefinitely
What are total surplus, worker surplus, and firm surplus in the two-sided search model?
Total surplus = z-b Worker surplus = w-b (wage minus UI benefit) Firm surplus = z-w (profit)
According to the data and analysis seen in class, climate change is likely to further reduce convergence between rich and poorer regions of the US and of the world as a whole...
True
Equilibrium unemployment rates vary over time, across states, and across countries
True
Forced savings policies include heavy taxation to pay for public investments, national pension systems that tax away a fraction of each paycheck in order to pay for retirement income, and low wages at state-owned firms if the money is used for investments
True
If people's expectations are accurate, then they should have no regrets about the decisions that they make (Nash equilibrium)
True
Raj Chetty's work reveals striking differences in measures of economic success across regions of the US, with particularly low measures of success (education, mobility, income) in the southeastern United States
True
The Solow model predicts convergence in per-capita GDP but the Romer model does not
True
Wages are higher if workers have more bargaining power and if workers UI benefits are higher
True The wage is increasing in both "a" (bargaining power) and "b" (unemployment insurance benefit) If workers have more bargaining power (unions or outside options) that is represented by a bigger "a" -- the worker gets more of the match surplus (over firm costs and over worker opportunity costs of accepting a job and losing unemployment benefit "b")
em(1,j) = em(1, A/Q) is the odds of an unemployed worker finding a match
True Where A are the number of job openings and Q is the number of other unemployed searching for matches too
In the Solow model, savings doesn't affect growth rate...
True and False True - Changes in the savings rate affect the level of per-capita GDP but not the growth rate False - Solow shows that capital is an important determinant of economic growth and there's no capital accumulation without savings
What are the short-run regularities in the behavior of the unemployment rate?
Unemployment is counter-cyclical During recessions, unemployment tends to increase sharply
How does the vacancy rate behave relative to the unemployment rate, and how does this matter for the Beveridge curve?
Vacancy rate is procyclical Unemployment rate is countercyclical This means that they are negatively related to each other. You will move down and to the right on the Beveridge curve during a recession You will move up and to the left on the Beveridge curve during an expansion
Ten US states are attempting to implement a work requirement for Medicaid assistance (government subsidized health insurance program for the poor -- those earnings less than $28k a year for a family of three); reforms along these lines are strongly endorsed by the Trump administration and Republican party generally. ... After one warning, those who failed to meet the requirement would be locked out of coverage for a year.
Wages down, unemploymet down
What happens to the Beveridge Curve when a country enters into a recession?
We move down and to the right along the curve Job opening rate = "vacancies"
What happens to the Beveridge Curve when a country enters into an expansion?
We move up and to the left along the curve Job opening rate = "vacancies"
Which of the following production functions is most similar to the one used in the 2-sided search model?
Y = zN
Using the Solow model, could differences in population growth, all other things being equal, explain persistent differences in standards of living across countries?
Yes, the high-population growth country will have lower standards of living
To move to a new golden rule per capita capital stock, an increase in either "n" or "d" would require...
a decrease in per capita savings because MPk would have to rise as (n+d) rose This is an interesting implication of the Solow model. The social planner chooses the efficient point which is where mpk=n+d. Just use this equation to think through the logic of what the Social Planner will do if (n+d) goes up - just increase MPk. The only way to do that is to reduce "k", so to reduce "s" to get to lower "k". If your "k" depreciates quickly, then only make good (highly productive) k investments.
In the endogenous growth model, workers divide their time between market work and
accumulating human capital
In the steady state Solow model...
aggregate consumption grows at a constant rate Consumption grows at the population growth rate so that per-capita Consumption is unchanging
High school apprenticeship programs are correlated with higher graduate rates from high school and college graduation rates by attendees. In the Romer model this would be...
an increase in "b", leading to an increase in slope of ln(C) and to higher GDP
Modern capital goods (computers, semi-conductors, fiber optic cable, routers, etc)...
are smaller and easier to replace than "brick and mortar" capital goods, but they depreciate more quickly
In the endogenous growth model presented in the text, suppose that "u" represents the fraction of time spent working (as opposed to accumulating human capital) and "b" represents the efficiency of human capital accumulation. The growth rate of human capital equals...
b(1-u)-1
A decrease in match efficiency
can explain the shift in the Beveridge Curve A change in "e" changes the relationship between u=1-em(j,1) and v=1-em(1/j,1) and shifts the Beveridge Curve
A decrease in TFP caused by severe storms, fires, or the pandemic would, in the Chapter 7 model from class, lead to a(n) _________ in the golden-rule level of per-capita savings and a(n) ________ in the golden-rule level of per capita consumption
decrease; decrease Golden rule savings rate: The optimal "s" that maximizes steady-state per capita consumption It happens when: MPk = n + d When "z" decreases: Productivity goes down so MPk decreases Capital inflow < Capital outflow Steady-state "k" decreases MPk = zf'(k) = n+d [f'(k) is decreasing in "k"] In steady-state, capital inflow = capital outlfow szf(k) = (n+d)k Steady-state "k" decreases, implies per capita savings szf(k) decreases What about per capita consumption? When "z" and "k" both go down, you must consume less: "c" decreases
Assume that tax money is used for infrastructure development that makes human capital accumulation more efficient. Using the Chapter 8 (endogenous growth, Romer model) model from class, we could predict _______ in current standards of living and _________ in the growth rate of standards of living.
decrease; increase This example is using taxes to make human capital technology more efficient Tax increases, consumption decreases - ln(ct) shifts down "b" increases: b(1-u) increases, so ln(ct) becomes steeper It will take "T*" years for the policy to break even Because of this short-run cost, poor countries may not be able to afford this policy
In the steady state of Solow's exogenous growth model, an increase in the growth rate of the labor force...
decreases output per worker and decreases capital per worker
In the 2-sided search model, a decrease in matching efficiency
decreases the size of the labor force As the odds of matching falls, the payoff from search falls and fewer people enter the labor force (they stay home and do non-market work)
A market failure associated with Keynesian economics is
economic agents cannot agree on prices and wages that are socially efficient This is the particular "coordination failure" that Keynesian economists think cause business cycles to have such lasting impacts on labor markets. In the DMP framework this coordination failure is the result of imperfect information about what the correct wage/price should be
Assume that M is the aggregate number of matches, "e" is the matching efficiency, "m(Q,A)" is the matching function, "Q" are job searchers and A is the number of vacancies. What is the odds of finding a job for the searching?
em(Q,A)/Q
What is the probability of finding a job for a searcher?
em(Q,A)/Q
The idea that contact with others with high levels of human capital increases one's own human capital is called human capital...
externality "human capital externality"
In the steady state of Solow's exogenous growth model, an increase in the savings rate...
increases output per worker and increases capital per worker
Consider the growth models of Chapter 7 and 8 [Solow (exogenous) and Romer (endogenous)] when answering the following: Assume the US Federal Reserve enacts policies that put upward pressure on world-wide interest rates such that "r" increases for Emerging Markets. The present value of human capital accumulation in emerging markets would _________ and their Consumption growth path would likely ______.
fall; get flatter The present value of "C'" is "C'/(1+r)" which falls as "r" increases, therefore the emerging market is less likely to allocate resources to the future. This might seem counter-intuitive, as you might think that human capital is an investment and as "r" has gone up they should invest more, but remember that human capital accumulation returns are determined by "H'=b(1-u)H" and not by the return on putting money in a bank The decision to invest in human capital involves a short-run cost (less C) and a long-run pay-off (more C') -> When the interest rate increases, this decreases the long-run pay-off of human capital
In the Solow model from Chapter 7, if there's no technological progress then steady-state output
grows at the rate of population growth Think: What happens in a "steady state"? In steady state, per capita variables don't change k = (K/N) does not change Per capita GDP = zf(k*) GDP = N*per-capita GDP = N*zf(k*) (remember what output and GDP are the same thing) So GDP will grow at the rate of population growth! As population grows, there will be more people saving, and hence capital accumulation and more output (due to more K and N) K keeps up with N as long as people save a constant fraction of their earnings
Countries with lower per-capita capital stock will have _____ MPk's
higher
In Solow's exogenous growth model, the steady-state growth rate of the capital stock can be increased by....
higher population growth Makes sense with MPk = n+d The question is about the capital stock, not about the level of capital per capita (k*). Capital per capita is constant in the steady-state, but that is because the numerator is growing to keep up with the denominator (population).
The US added an extra premium to the unemployment insurance benefit to help support workers during the pandemic. Using the two-sided search model from Chapter 6, an increase in "b" could lead to ________ incomes for those that don't find jobs and ________ incomes for those that do find jobs.
higher; higher "b" increases the worker's outside options This would raise the worker's bargaining position! Firms need to make a better wage offer This would lead to incomes increasing both employed and unemployed workers (both get more wage, not just the unemployed) w = (1-a)(z-b) + b = (1-a)z +ab
With _____________, in the absence of government, there is no way for the current generation to have compensated the previous generation for their investments in institutions or education, so the previous generations would, absent government likely under-invest in _______________ This is why the government needs to take a long view and try to maximize steady-state per capita consumption (golden rule)
human capital investments human capital
Assume that a greater number of young people choose to go to school and training programs rather than enter the labor force, so that labor force participation rates decline. In order to maximize a balanced budget government will likely have to _____ current tax rates and _____ future tax rates.
increase; decrease G=tY G is unchanged, so what must happen to "t" in order to offset changes in GDP implied by the question ("t" would need to rise)
In the Chapter 7 model from class, a decrease in population growth would lead to _______ in the golden-rule level of standards of living and to ______ in the golden-rule growth rate of standards of living
increase; no change Golden rule savings rate: MPk = n+d When "n" decreases: Capital outflow decreases Capital inflow > Capital outflow Steady-state "k" increases Standards of living = per capita GDP = zf(k) increases What about growth rate of zf(k)? Note that the change in "k" is a one-time jump (short-run) Change in "n" will not lead to persistent growth In the long run, growth rate depends on shocks to TFP (growth of z)
According to the Solow growth model, an increase in TFP will most likely lead to a(n) ____________ in the golden rule level of per capita capital stock and a movement to the ______ along the new savings curve
increase; right As TFP (z) increases, MPk increases This would mean that MPk > n+d at the original golden rule level of k. MPk must fall back down to equal "n+d" (which is unchanged), which happens as "k" increases (diminishing returns)
According to the model from class, Apprenticeship Programs could increase match efficiency and thereby...
lead to both more job creation and higher labor force participation Note that this doesn't apply to: - Leading to both higher wages and higher firm match surplus - Lead to both total factor productivity growth and to lower costs of capital All of these things might seem intuitive but in the model neither wages, TFP, nor the cost of capital are affected by match efficiency (which is what improves due to the Apprenticeship program). More complicated models of course try to model these interactions.
Adjusting for risk, ____ developed economies will seem more attractive to international investors, money will flow into those economies and they will grow quicker
less
Countries with larger per-capita capital stock will have ____ MPk's
lower
Assume a decline in match efficiency "e" like we saw during the Great Recession. Using the two-sided search model from Chapter 6, a decrease in "e" woud lead to ______ employment and ________ unemployment rates
lower; higher Solving through intuition: "e" decreasing makes it harder to match This is bad for both workers and firms The firm does not want to post vacancies (A decreases) This means workers are less likely to search (Q decreases) It's like a recession: Expect j=A/Q decreases unemployment (u) = 1-em(j,1) increases Employment (M) = em(1,j)Q
Assume that the virus appears to be increasingly under control and that firms are able to match more employees with existing capital, increasing match efficiency "e". Using the two-sided search model from chapter 6, an increase "e" would lead to ______ unemployment rates and a ______ shift in the Beveridge Curve at the initial vacancy rate.
lower; inward
"With renewed upticks in COVID-19 infections in places that had reduced local transmission to low levels, re-openings have paused, and targeted shutdowns are being reinstated. Economies everywhere face difficult paths back to pre-pandemic activity levels", the IMF said [10/13/2020] Using the Chapter 7 Solow model from class, a reduction in TFP (z) in growth would lead to _______ per capita savings and _______ standards of living.
lower; lower What happens when "z" decreases in Solow model? Standards of living = per capita GDP = zf(k*) Savings = s*per capita = szf(k*) Intuition: "z" decreasing leads to lower savings and standards of living. But what happens to k*?
Many economists expect that even once the pandemic is behind us that we will see a steep drop-off in productive capital. In the Chapter 6 model...
match probability would fall and productivity would rise Worker match probability and unemployment always move in opposite directions, as u=1-em(1,j)
Assume that the virus appears to be increasingly under control and that firms are able to match more employees with existing capital, increasing worker productivity. Using the two-sided search model from chapter 6, an increase in TFP would lead to both __________ vacancies and ________ vacancy rates.
more; higher Vacancy rate increases, as it is more difficult for firms to hire workers
A model that explains the Beveridge Curve would predict that as the economy expands, firms create _______ job openings and that workers ________ in unemployment
more; less time
Assume that the virus appears to be under control and that firms are able to match more employees with existing capital, increasing worker productivity (z). Using the two-sided search model from chapter 6, an increase in TFP would lead to both ___________ labor force participation and __________ unemployment rates.
more; lower
Human capital is ____________ Human capital isn't a scarce good - if one country has good institutions or high levels of education, it doesn't use up the world supply of that input. All countries can potentially invest equally in "H"
non-rival
Paul Romer argues that a key feature of knowledge is
nonrivarly
Consider the Solow growth model from Chapter 7 where MPk > n+d. In order to approach the golden-rule level of per-capita consumption
per capita savings should increase This is because we would need to lower MPk to achieve the golden rule. Need to think of the relationship between MPk and k (k small, MPk large and k large, MPk small - this is because there are diminishing returns on capital). That means in this problem we have a small k, which is why the MPk > n+d The social planner would therefore want people to save more; by savings more, capital would accumulate, and hence k would increase The social planner would choose the optimal savings rate that leads to the golden rule, which maximizes per capita consumption
Consider the graph from the chapter 8 endogenous growth model that shows (log) Consumption as a function of time. An increase in the efficiency of human capital-augmented labor input (z) would...
permanently shift the Consumption path, but not change its slope The slope of the Consumption path is determined by b(1-u); the level of the Consumption path is determined by previous investments in H and by the efficiency with which human capital-augmented labor produces output
Because the payoff is intergenerational and non-transferable (you can't sell your human capital to another country) ____________ countries have a hard time borrowing to making investments in ____________
poor human capital This is a concern that the cost of current consumption due to human capital investments is more than poor countries can sustain (the T years to recovery investment)
If technological progress is traded internationally, the Solow model predicts that international capital flows will lead to more rapid growth in ______ countries than in ______ countries, making them ________ toward the per-capita GDP levels observed in the _____
poor; rich; poor; converge
In the Golden Rule steady state, the marginal product of capital is equal to the...
population growth rate plus the depreciation rate The Golden Rule steady state is the one chosen by the social planner. The social planner choose savings so that we end up at a level of capital where "MPk = n+d"
The labor force participation rate is
pro-cyclical Although income and substitution effects may cancel out in the long run (no relationship between GDP and labor force participation), in the short run it is clear that as GDP rises, the employment rate rises more than the unemployment rate falls and the labor force participation rate increases. It doesn't have to be this way in theory, but it's how it turns out in the data
All of the following are found in the data to contribute to rising average standards of living, except...
protection of domestic firms from foreign competition What would contribute to rising average standards of living: - Patent protection enforcement - Literacy rates - Correction of market failures in capital markets
In the 2-sided search model, an increase in productivity does not
reduce labor market tightness Higher productivity increases the firm benefit if it forms a match, so there's more entry of firms into the market, increasing j (labor market tightness)
In the 2-sided search, a decrease in the unemployment insurance benefit
reduces the unemployment rate u = 1-em(j,1) j is determined in the firm's labor demand graph where em(1/j,1) = k/[(1-a)(z-b)] Intuitively if the unemployment insurance benefit falls it reduces workers outside options and the firm does better, which causes more entry of firms and makes it easier for workers to find a job If b does down, (z-b) goes up and the ratio = em(1/j,1) does down. That happens when j does up (firm earns more from the match so there's more entry and j=A/Q rises) As j rises, em(1,j) rises and the unemployment rate goes down
From 2009 to 2012 the Beveridge Curve
shifted to the right This is best explained in our labor search model by a fall in match efficiency (e), as firms begin searching for higher-skilled workers to complement new capital technologies
The opportunity cost of investing in "H" is current consumption foregone, but it makes the growth path of consumption ___________. A period of investment in Human capital will take "_______" years to break even, but thereafter the country is better off
steeper; T
Assume the Solow model from class. Using the usual notation: "n" is population growth rate, "d" is depreciation rate, "k" is capita capital stock, "s" is the savings rate and "y" is per capita output. Assume that the per capita capital stock of the economy is lower than the steady-state per capita capital stock. Then: A. sy < (n+d)k B. sy = (n+d)k C. sy > (n+d)k D. Per capita investments = (n+d)k
sy > (n+d)k
Assume the Solow model from class. Using the usual notation: "n" is population growth rate, "d" is depreciation rate, "k" is per capita capital stock, "s" is the savings rate and "y" is per capita output. Assume that the per capita capital stock of the economy is lower than the steady-state per capita capital stock...
sy > (n+d)k sy = szf(k) k < k*
In Solow's model of economic growth, suppose that the "s" represents the savings rate, "z" represents total factor productivity, "k" represents the level of capital per worker, and "f(k)" represents the per-worker production function. Also suppose that "n" represents population growth rate and "d" represents the depreciation rate of capital. The equilibrium level of capital per worker "k*", will satisfy the equation
szf(k*) = (n+d)k* The left side of the equation shows the amount of new capital contributions and the right side is the per-period reduction in per capita capital stock. They balance in the steady-state so that K/N is unchanging.
In the 2-sided search model
the firm's surplus from a match is equal to a constant fraction of total surplus z-w = (1-a)(z-b)
Use the endogenous human capital accumulation model from Chapter 8 to consider the following real-world situation: Imagine that internet access improves for people living in remote and under-developed regions of the world; Less-Developed Economic Consumption would likely ________ in the current period and be on________ growth path as a result.
unchanged; steeper Internet access to these regions would be an increase in human capital accumulation efficiency (b). Human capital efficiency affects future, not current output. Know that model assumptions that affect current efficiency are called "z" and things that affect knowledge accumulation are called "b" You might think that "z" and "b" might be correlated in the real world - that things that affect "b" might also affect "z". That is likely true and that is an easy thing to add to the model.
According to the 2-sided search model from class, an increase in the UI benefit (b) will cause...
wages to increase but it will get harder to find a job
Late in 2017 the Trump administration passed a corporate profits tax cut. The impact on the effective tax rate (rate actually paid by firms after deductions) is not as large as it appears on paper, but it is still the case that the cost of capital is now lower for many US firms. Use the two-sided search model from chapter 6 to predict the impact of a fall in "k" on the US labor market.
wages unchanged, both employment and GDP increase
The CARES Act provided for a $600 lump-sum
weekly addition to state UI benefits through the end of July
An important feature of the 2-sided search model is that
would-be workers care not just about the market wage but about the chances of finding work
