Question

(a) Suppose the government successfully manages to reduce the population growth rate, n. Briefly explain how the new steady-state that the economy will reach for this lower population growth rate compares to the state-state that the economy was in with the higher population growth rate. Is consumption per effective worker, c, higher in this new steady state? Why or why not?

(b) Does the reduction in the birth rate affect the long term growth rate of income per effective worker? Does the reduction in the birth rate affect the long term growth rate of income per worker? Explain

Answer 1

Answer a

The economy will reach a higher steady state due to the decrease in the population growth. The capital intensity will increase with the constant savings rate due to the decrease in n. The decrease in population growth decreases the growth rate of aggregate output. It increases the level of per capita output.

Consumption per effective worker tends to increase as there is a decrease in population growth. Due to the decrease in population growth, the labor force will decrease and therefore there will be more to consume if the effectiveness of labor remains same.