Question

Suppose a Romer economy is on a balanced-growth path with an annual growth rate equal to 3%. Then, in year 2030, research productivity z doubles permanently, from z=0.004 to 0.008.

Make a graph of per-worker real GDP (y) over time on a ratio scale. Which of the following is the main feature of the graph? *

A.) Quadratic function with an increase in the slope when z changes.

B.) Linear function with an increase in the slope when z changes.

C.)Linear function with an increase in the slope and a drop in the level when z changes.

D.) Exponential curve with an increase in the slope when z changes.

Answer 1

Answer :

B). Linear function with an increase in the slope when z changes.

If z doubles then g will double and growth rate of At will also double. So if the fraction of workers that produce research or output remains constant, then growth rate of yt=growth rate of At and thus yt will also double hence the slope of the graph will double.

Note : In the following graph the slope changes at 2040,but in the case of your question it should be 2030.

Hence, Alternative B is correct.