Question

Use the following information to answer the question(s) below:

(1) the rate of depreciation is 10% per year,

(2) the population growth rate is 2% per year, and

(3) the growth rate of technology is 3% per year.

a. Refer to the information above. Which of the following equals the annual growth rate of "effective labor" in the steady state in this economy?
A) 2%
B) 3%
C) 5%
D) 10%
E) 15%

b. Refer to the information above. Which of the following represents the steady-state growth rate of output in this economy?
A) 2%
B) 3%
C) 5%
D) 10%
E) 15%

c. Refer to the information above. Which of the following represents the steady-state growth rate of output per worker in this economy?
A) 2%
B) 3%
C) 5%
D) 10%
E) 15%

I already know the answer. I just need clarifying on how to do it. Thank you

Answer 1

d= 10%

n =2%

g= 3%.

(a) Annual growth of effective labor in the steady state in this economy = n + g = (2 +3)% = 5%

Because effective labor = EL . Therfeore, growth rate of technoogical progress and growth rate of labor force will make the growth of effective labor in the stetady state.

Hence, option (C) is correct.

(b) Steady -state growth rate of output in this economy = n+g = (2 +3)% = 5%.

Because Y = y (EL)

y is growing at rate 0 . Therefore, Y is grows at rate of technological progress and labor force i.e (g and n).

Hence, option (C) is correct.

(c) Steady-state growth rate of output per worker in this economy = g = 3%

Because y = Y/ EL

Y/ L = y (E)

And output per effective worker i.e y grows at rate 0.

Therefore, Y/L grows at the rate of technological progress i.e g = 3%.

Hence, option(B) is correct.