Question

4. Use the Solow growth model to graph and illustrate how higher technological progress (an increase...

4. Use the Solow growth model to graph and illustrate how higher technological progress (an increase in g) will impact the steady-state capital per effective worker (k*), the steady-state level of output per effective worker (y*), and the steady-state level of consumption per effective worker (c*). Show each of these on the graph before and after the increase in technological progress and indicate how the higher technological progress will shift the curves on the graph.

Homework Answers

Answer #1

We assume the per-capita production function of the form: y = f(k)

Initially, the economy is at steady state at k1, with investment i1 = sf(k1) and consumption, c1 = y1 –i1.

After the increase in g1, the breakeven investment line shifts from (ẟ + n + g1) to (ẟ + n + g2). This shift results in increase of per capita capital to k2, with investment increasing to i2 = sf(k2) and consumption, c2 = y2 –i2. Thus, with increased technological progress, the economy grows faster as reflected by the increased steady state values.

The diagram below depicts the situation:

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