MACRO CH 11

In the absence of technological progress, we know that the level of output per worker in the steady state will

remain constant.

Suppose the following situation exists for an economy: Kt+1/N = Kt/N. Given this information, we know that

saving per worker equals depreciation per worker in period t.

Suppose the following situation exists for an economy: Kt+1/N > Kt/N. Given this information, we know that

saving per worker is greater than depreciation per worker in period t.

Suppose the following situation exists for an economy: Kt+1/N < Kt/N. Given this information, we know that

saving per worker is less than depreciation per worker in period t.

Suppose two countries are identical in every way with the following exception. Economy A has a greater quantity of human capital than economy B. Given this information, we know with certainty that

steady state consumption in A is higher than in B.

When an economy is operating at the steady state, we know that

steady state saving is equal to depreciation per worker.

An increase in the saving rate will not affect which of the following variables in the long run?

the growth rate of output per worker

Suppose there are two countries that are identical in every way with the following exception: Country A has a higher stock of human capital than country B. Given this information, we know with certainty that

the growth rate will be the same in the two countries

Suppose there are two countries that are identical in every way with the following exception: Country A has a higher saving rate than country B. Given this information, we know with certainty that

the growth rate will be the same in the two countries.

Suppose there are two countries that are identical in every way with the following exception: Country A has a lower depreciation rate (δ) than country B. Given this information, we know with certainty that

the growth rate will be the same in the two countries.

Which of the following statements is always true?

Any change in the capital stock is equal to investment minus depreciation.

Suppose two countries are identical in every way with the following exception. Economy A has a higher rate of depreciation (δ) than economy B. Given this information, we know with certainty that

B) steady state consumption in A is lower than in B.

A reduction in the saving rate will not affect which of the following variables in the long run?

B) the growth rate of output per worker

During the latter half of the 1990s, the U.S. saving rate decreased. Will this reduction in the saving rate have a permanent effect on the rate of growth of output per worker? Explain.

Changes in the saving rate can only cause temporary changes in the growth rate. Once the new steady state is reached (caused by the drop in s), the growth rates would return to zero.

An increase in the saving rate will affect which of the following variables in the long run?

D) all of the above

Explain the two relations that determine the evolution of output in the long run.

The amount of capital determines the amount of output being produced. The amount of output determines the amount of saving and in turn, the amount of capital being accumulated over time.

If endogenous growth models are correct, a lower rate of growth in the long run could occur as a result of which of the following?

a lower rate of saving

Suppose the saving rate is initially greater than the golden rule saving rate. We know with certainty that an increase in the saving rate will cause

a reduction in consumption per worker.

Suppose the saving rate is initially greater than the golden rule saving rate. We know with certainty that a reduction in the saving rate will cause

a reduction in output per worker.

At the current steady state capital-labor ratio, assume that the steady state level of per capita consumption, (C/N)*, is greater than the golden rule level of steady state per capita consumption. Given this information, we can be certain that

a reduction in the saving rate will have an ambiguous effect on (C/N)*.

At the current steady state capital-labor ratio, assume that the steady state level of per capita consumption, (C/N)*, is less than the golden rule level of steady state per capita consumption. Given this information, we can be certain that

a reduction in the saving rate will have an ambiguous effect on (C/N)*.

Suppose, due to the effects of a military conflict that has ended, that a country experiences a large reduction in its capital stock. Assume no other effects of this event on the economy. Which of the following will tend to occur as the economy adjusts to this situation?

a relative high growth rate for some time

Suppose there is an increase in the saving rate. This increase in the saving rate must cause an increase in consumption per capita in the long run when

capital per worker approaches the golden-rule level of capital per worker.

Which of the following are reasons to suspect spending on education might overestimate human capital investment?

Part of total spending on education is really consumption.

As an economy adjusts to an decrease in the saving rate, we would expect output per worker

none of the above

As an economy adjusts to an increase in the saving rate, we would expect output per worker

none of the above

Based on our understanding of the model presented in chapter 11, which of the following will cause a permanent increase in growth?

none of the above

For this question assume that technological progress does not occur. The rate of saving in Canada has generally been greater than the saving rate in the U.S. Given this information, we know that in the long run

none of the above

Our model of long-run economic growth suggests that

none of the above

Suppose the following situation exists for an economy: Kt+1/N < Kt/N. Given this information, we know that

none of the above

Suppose two countries are identical in every way with the following exception. Economy A has a higher saving rate than economy B. Given this information, we know with certainty that

none of the above

The golden rule level of capital refers to

none of the above

Which of the following is not a flow variable?

output

Suppose the saving rate is initially less than the golden rule saving rate. We know with certainty that a reduction in the saving rate will cause

all of the above

Which of the following represents the effects in period t of an increase in the saving rate in period t?

all of the above

Which of the following will cause an increase in output per worker in the long run?

all of the above

Which of the following will likely cause a reduction in output per worker?

all of the above

Which of the following will likely cause an increase in output per worker?

all of the above

Suppose the economy is initially in the steady state. A reduction in the depreciation rate (δ) will cause

an increase in K/N.

The countries with the lowest output per capita

are poor in both human and physical capital.

Which of the following represents the change in the capital stock?

investment minus depreciation

Suppose the following situation exists for an economy: Kt+1/N = Kt/N. Given this information, we know with certainty that

investment per worker equals depreciation per worker in period t.

The capital-labor ratio will tend to increase over time when

investment per worker exceeds saving per worker.

When the economy is in the steady state, we know with certainty that

investment per worker is equal to depreciation per worker.

The capital-labor ratio will tend to decrease over time when

investment per worker is less than saving per worker.

Suppose policy makers wish to increase steady state consumption per worker. Explain what must happen to the saving rate to achieve this objective.

it depends! Whether the saving rate must increase, decrease, or remain constant depends on what the current saving rate is compared to the golden rule saving rate. If s < sg, the saving rate must increase to increase steady state consumption. If s > sg, the opposite must occur.

The Social Security system in the United States was introduced in which year?

1935

Explain the difference between fully funded social security system and pay-as-you-go social security system.

Fully funded social security system taxes workers, invests their contributions in financial assets, and pays back the principal plus the interest to the workers when they retire. Pay-as-you-go system taxes workers and redistributes the tax contribution as benefits to the current retirees. There are two major differences between the two systems. First, what retirees receive is different in each case. Second, the two systems have different macroeconomic implications. In both systems private saving goes down. But in the fully funded system, public saving goes up and it has no effect on total saving and no effect on capital accumulation. In the pay-as-you-go system, the decrease in private saving is not compensated by an increase in public saving. Total saving goes down, and so does capital accumulation.

Explain what human capital is and discuss how changes in human capital can affect output per worker.

Human capital represents the set of skills possessed by labor. In addition to physical capital, changes in H will also cause changes in output. So, an increase in H/N will also cause an increase in Y/N.

Suppose depreciation per worker is less than saving per worker. Given this situation, explain what will happen to each of the following variables over time: capital per worker, output per worker, saving per worker, and consumption per worker.

If depreciation is less than saving, it is also less than investment. Alternatively, there is excess investment to offset the amount of capital that wears out. So, the capital stock will increase. This will cause an increase in K/N, Y/N, and S/N. As Y/N rises, so will C/N.

In the model where it is assumed that the state of technology does not change, what parameters and/or variables cause changes in steady state output per worker.

In general, output per worker will depend on the capital-labor ratio. The equilibrium capital-labor ratio will depend on the saving rate and on the rate of depreciation. Output will also depend on the amount of human capital per worker. So, changes in s, δ, and H will cause changes in output per worker.

Graphically illustrate and explain the effects of a decrease in the saving rate on the Solow growth model. In your graph, clearly label all curves and equilibria.

The decrease in s will cause a reduction in S/N and I/N. At the initial K/N, depreciation is more than investment. Alternatively, there is not enough investment to offset the amount of capital that wears out. So, the capital stock will decrease. This will cause a decrease in K/N, Y/N, and S/N. As Y/N falls, so will C/N. This is all shown easily with the graph of the model.

Graphically illustrate and explain the effects of a decrease in the rate of depreciation (δ) on the Solow growth model. In your graph, clearly label all curves and equilibria.

The depreciation line becomes flatter and at the initial K/N depreciation is now less than investment. In this case, K/N and Y/N will rise. If depreciation is less than saving, it is also less than investment. Alternatively, there is excess investment to offset the amount of capital that wears out. So, the capital stock will increase. This will cause an increase in K/N, Y/N, and S/N. As Y/N rises, so will C/N. This is all shown easily with the graph of the model.

Graphically illustrate and explain the effects of an increase in the rate of depreciation (δ) on the Solow growth model. In your graph, clearly label all curves and equilibria.

The depreciation line becomes steeper and at the initial K/N depreciation is now greater than investment. In this case, K/N and Y/N will fall. If depreciation is greater than saving, it is also greater than investment. Alternatively, there is insufficient investment to offset the amount of capital that wears out. So, the capital stock will decrease. This will cause a reduction in K/N, Y/N, and S/N. As Y/N falls, so will C/N.

Explain what condition must occur for each of the following to occur: (1) the capital stock to increase; (2) the capital stock to decrease; and (3) the capital stock to remain constant.

The equation for the change in the capital stock (per worker) is given by the following: (Kt+1/N) - (Kt/N) = s(Yt/N) - δ(Kt/N). The capital stock will not change when investment equals depreciation. If investment/saving exceeds (is less than) depreciation, the capital stock will grow (decline).

Graphically illustrate and explain the effects of an increase in the saving rate on the Solow growth model. In your graph, clearly label all curves and equilibria.

The graph is easy. The increase in s will cause an increase in S/N and I/N. At the initial K/N, depreciation is less than investment. Alternatively, there is excess investment to offset the amount of capital that wears out. So, the capital stock will increase. This will cause an increase in K/N, Y/N, and S/N. As Y/N rises, so will C/N. This is all shown easily with the graph of the model.

In the absence of technological progress, which of the following is true when the economy is operating at the steady state?

The growth of output per worker is zero.

Suppose there is an increase in the saving rate. Explain what effect this will have on output, output per worker, the rate of growth of output, and the rate of growth of output per worker.

The increase in s will cause an increase in S/N and I/N. At the initial K/N, depreciation is less than investment. Alternatively, there is excess investment to offset the amount of capital that wears out. So, the capital stock will increase. This will cause an increase in K/N, Y/N, and S/N. As Y/N rises, so will C/N.

Explain the relationship among output, saving, and investment.

The level of output (per worker) will depend on the capital-labor ratio. The amount of capital will depend on investment (and depreciation). Investment will, in turn, depend on the amount of saving. Changes in saving will cause changes in investment, capital, and, therefore, output.

Suppose there is a reduction in the saving rate. Explain what effect this will have on output, output per worker, the rate of growth of output, and the rate of growth of output per worker.

The reduction in s will cause a decrease in S/N and I/N. At the initial K/N, depreciation is more than investment. Alternatively, there is not enough investment to offset the amount of capital that wears out. So, the capital stock will decrease. This will cause a decrease in K/N, Y/N, and S/N. As Y/N falls, so will C/N.

Suppose the saving rate is greater than the golden rule saving rate (sG). First, explain what must happen to the saving rate in order to increase steady state consumption. Second, what are the advantages and disadvantages of this policy to increase steady state consumption.

The saving rate must decrease. This will cause an initial increase in consumption per worker. As the economy responds to this reduction in s, K/N and Y/N will fall. In fact, C/N will rise (as long as the drop in s does not go past the golden rule rate) as well and eventually exceed its initial level. The advantage of such a policy is that it will increase C/N initially and in the long run (given the previous qualifier). The are few if any disadvantages. It is possible to cut s too much (this has not been discussed here).

For an economy in which there is no technological progress, explain what must occur for the steady state to occur. Also explain what this implies about the rate of growth of output, output per worker, and the capital stock.

The steady occurs when the economy is in equilibrium. Specifically, the steady state refers to the situation where K/N and Y/N are constant. K/N will not change when investment per worker equals depreciation per worker. During the adjustment process, the growth rates of Y, Y/N, and K/N will all be negative. Once the steady state is reached, these variables are constant and the growth rates will be zero.

Suppose an economy experience a 4% increase in each of the following variables: N, K, and H (human capital). Given this information, we know with certainty that

Y will increase by less than 12% but by more than 4%.

Suppose an economy experiences a 5% increase in human capital. We know that this will cause

Y/N to increase by less than 5%.

variables cause changes in steady state output per worker?

all of above

If the saving rate is 1 (i.e., s = 1), we know that

all of the above

In the absence of technological progress, which of the following remains constant in the steady state equilibrium?

all of the above

Suppose the economy is initially in the steady state. A reduction in the depreciation rate (δ) will cause

all of the above

Suppose the economy is initially in the steady state. An increase in the depreciation rate (δ) will cause

all of the above

When steady state capital per worker is above the golden-rule level, we know with certainty that an increase in the saving rate will

decrease consumption in both the short run and the long run.

In the absence of technological progress, we know with certainty that an decrease in the saving rate will cause which of the following?

decrease steady state consumption only if the decrease in saving is less than the decrease in depreciation

In the absence of technological progress, a decrease in the saving rate will cause which of the following?

decrease temporarily the growth of output per worker

In the absence of technological progress, we know with certainty that an increase in the saving rate will cause which of the following?

increase steady state consumption only if the increase in saving is less than the increase in depreciation

In the absence of technological progress, an increase in the saving rate will cause which of the following?

increase temporarily the growth of output per worker