Question

Suppose that the economy is initially in a steady state and that some of the nation’s capital stock is destroyed because of the natural disaster or a war.

(a) (10 points) Determine the long-run effects of this on the quantity of capital per worker, output per worker, and their growth rates.

(b) (10 points) In the short run, does the aggregate output grow at a rate higher or lower than the growth rate of the labor force?

(c) (5 points) After the World War II, growth in real GDP in Germany and Japan was very high. How do your results in parts (a) and (b) shed light on this historical evidence?

Answer #1

a) The long-run equilibrium is not changed by an alteration of the initial conditions. If the economy started in a steady state, the economy will return to the same steady state. If the economy were initially below the steady state, the approach to the steady state will be delayed by the loss of capital.

b) Initially, the growth rate of the capital stock will exceed the growth rate of the labour force. The faster growth rate in capital continues until the steady state is reached.

c) The rapid growth rates are consistent with the Solow model’s predictions about the likely adjustment to a loss of capital.

Suppose that the economy is initially in steady state and that some
of the nation’s capital stock is destroyed because of a natural
disaster or a war.
A. Determine the long-run effects of this on the quantity of
capital per worker and on output per worker.
B. In the short run, does aggregate output grow at a rate
higher or lower than the growth rate of the labour force
C. After world war 2 , growth in real GDP in...

Suppose that a closed economy is in a steady state equilibrium
in the long-run. If there is a decrease in the depreciation rate of
this economy, discuss what will happen to the steady state
equilibrium, output per worker and capital per worker in this
economy. Graphically show and explain the developments by clearly
labeling your graphs.

4. How would each of the following changes affect the steady
state values of capital per worker and output per worker? a. A
large fraction of the physical capital stock is destroyed in a war.
b. A negative supply shock sharply reduces productivity.

2. The Solow-Swan Model
a) Consider an economy that is initially in a steady state
equilibrium. Assume that in this equilibrium it has a saving rate
of 50 per cent and a depreciation rate of 2 per cent. Further
assume that the population is constant and that the level of output
produced can be represented by the following production function: Y
= AKαL 1−α where A = 1 and α = 0.5. Use the Solow-Swan model to
determine the level...

Suppose an economy is initially in a steady state with capital
per worker below the Golden Rule level. If the saving rate
increases to a rate consistent with the Golden Rule, then in the
transition to the new steady state consumption per worker will:
a. always exceed the initial level.
b. first rise above then fall below the initial level.
c. always be lower than the initial level.
d. first fall below then rise above the initial level.

3- Growth Model
Suppose that the output (Y) in the economy is given by
the following aggregate production function.
Yt = Kt +Nt
where the Kt is capital and Nt is population.
Furthermore assume that the capital depreciate at the rate of ẟ and
That saving constant and proportion s of income you may assume that
ẟ>s
1-suppose that the population remains constant . solve
for the steady state level of capital per worker
2- now suppose that the population...

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Suppose an economy described by the Solow model is in a steady
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where Kt is capital and Nt is the population. Furthermore,
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constant proportion s of income. You may assume that δ > s.
Suppose that the population remains constant. Solve for the
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Now suppose that the population grows at rate n. Solve...

Use the Solow model to solve. Suppose, you are the chief
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(b) Say that population growth decreases in...

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