Question

1. In the Solow growth model with population growth, but no technological progress, if in the steady state the marginal product of capital equals 0.10, the depreciation rate equals 0.05, and the rate of population growth equals 0.03, then the capital per worker ratio is below/above/equal to the Golden Rule level.
   1. We can optimize per-capita income by increasing/decreasing/leaving alone the savings rate.
   2. What governmental policy could achieve this strategy?

Answer 1

The capital per worker ratio is below the Golden Rule level. This is so since MP_K - Depreciation > n according to the given data set. Whereas at golden rule level,  MP_K - Depreciation = n .

Because MPK-dep.=n at GR but MPK-dep. > n here.

We can optimize the per capita income by increasing the saving rate. However, a higher saving rate is not permanently translated into higher growth, it is just a temporary increase in the growth rate.

The government can achieve this strategy by altering its monetary policy. It could increase the interest rates, which would increase the opportunity cost of keeping savings in banks, and thus increase the savings rate.