Macrotheory Chapter 8

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 decrease but finally approach a level above its initial state.

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

0

If y = k1/2, there is no population growth or technological progress, 5 percent of capital depreciates each year, and a country saves 20 percent of output each year, then the steady-state level of capital per worker is:

16

The Golden Rule level of steady-state consumption per worker is:

AB

Which of these statements is NOT true about the steady state of the basic Solow model?

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

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

Investment; depreciation

In the discussion of German and Japanese postwar growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly affect the capital stock but that casualties reduce the labor force. Assume that the economy was in a steady state before the war, that the saving rate is unchanged, and that the rate of population growth is the same as before the war. What happens subsequently to output per person in the postwar economy?

It declines

In the discussion of German and Japanese postwar growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly affect the capital stock but that casualties reduce the labor force. Assume that the economy was in a steady state before the war, that the saving rate is unchanged, and that the rate of population growth is the same as before the war. What is the immediate impact on total output?

It decreases

In the discussion of German and Japanese postwar growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly affect the capital stock but that casualties reduce the labor force. Assume that the economy was in a steady state before the war, that the saving rate is unchanged, and that the rate of population growth is the same as before the war. What is the immediate impact on output per person?

It increases

Which of the following production functions has constant returns to scale?

Y=K+L

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

results in higher consumption at all times in the future.

The formula for steady-state consumption per worker (c*) as a function of output per worker and investment per worker is:

c* = f (k*) - 𝛿δk*.

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

constant proportion of income.

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

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

If the economy has more capital than in the Golden Rule steady state, reducing the saving rate will ____ steady-state income and ____ steady-state consumption.

decrease, increase

Suppose the steady-state capital stock is initially below the Golden Rule level. Use the Solow growth model to assess the following claim: "Devoting a larger share of national output to investment would help restore rapid productivity growth and rising living standards." Living standards will initially ____ and _____ as the economy achieves a new steady state.

fall, return to a higher level

If the per worker production function for an economy is given by y = k1/2, the saving rate is 0.3, the depreciation rate is 10%, and the economy starts off with 25 units of capital per worker, then the capital per worker will _____ and output per worker will _____ as the economy approaches the steady state.

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

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

fall; fall

In this graph, starting from capital-labor ratio k1, the capital-labor ratio will:

increase

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

saving rate.

In the discussion of German and Japanese postwar growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly affect the capital stock but that casualties reduce the labor force. Assume that the economy was in a steady state before the war, that the saving rate is unchanged, and that the rate of population growth is the same as before the war. What happens to the growth rate of output per worker after the war but before the economy reaches a new steady state?

It is less than zero

In the steady state of the Solow model, higher population growth leads to a ____ level of income per worker and ____ growth in total income.

lower, higher

According to the Solow model, if an economy increases its saving rate, then in the new steady state, compared with the old one, the marginal product of capital will be ____ and the growth rate of income per person will be ____.

lower, the same

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

steady-state consumption per worker would be higher in a steady state with a lower saving rate.

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 per worker.

If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow model predicts that output will grow and that the new steady state will approach:

the same level of output per person as before.

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

requires initially reducing consumption to increase consumption in the future.

Suppose the steady-state capital stock is initially below the Golden Rule level. Use the Solow growth model to assess the following claim: "Devoting a larger share of national output to investment would help restore rapid productivity growth and rising living standards." Productivity growth will initially ____ and _____ as the economy achieves a new steady state.

rise, return to its initial level

In the basic Solow model, at the Golden Rule steady state, the marginal product of capital equals

the depreciation rate