Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 5, Problem 1E
To determine
The impact of tax policy that reduces the investment and discourages the investment.
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Consider the Solow Model. Suppose a country enacts a tax policy that discourages investment, and the policy reduces the investment rate immediately and permanently from sbar to sbarprime . Assuming the economy (and hence the initial capital stock) is in its initial steady state, use the Solow Model to explain what happens to the economy over time and in the long run. Draw a graph showing how output evolves over time (put Y_t on the vertical axis with a ratio scale and time on the horizontal axis), and explain what happens to economic growth over time.
In the Malthusian model, suppose that the quantity of land increases.
A) using diagrams, determine what effects this has in the long-run steady state and explain your results.
b)Plot what happens to the following variables over time as a result of the increase in the quantity of Land, population size and consumption per person
Use the Solow model below to answer the question.
Y 3
Y ₂
2
Y₁
K₁
K₂
K3
Y = Af (K, H)
dk
SY
K
Suppose that Y₁ is 1,436, Y₂ is 6,076, and Y3 is 11,238. The savings rate for this economy is 11%
and the depreciation rate is 5.1%.
If this economy is currently at a GDP of 1,436, what is the smallest amount of foreign aid which
would move the economy up to a GDP of 11,238?
Assume that all foreign aid becomes investment. Round your final answer to two decimal places.
Chapter 5 Solutions
Macroeconomics (Fourth Edition)
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Similar questions
- You were discussing the growth models with your friend Gaston during spring break. He summarized that the basic difference between the Solow model and the Romer model is that the Solow model suffers from diminishing returns-each additional unit of capital has less benefit than the previous unit. The Romer model doesn't have the same problem as labor used to generate new ideas doesn't have diminishing returns. He hypothesizes that if you changed the law of motion to At+1 = At + zol1/2A; that now the Romer model has diminishing returns to labor and will reach a steady state where growth is zero. Is he right?arrow_forwardSuppose a war destroys part of a nation's population but not its capital stock, (say on account of a neutron bomb being deployed). Use the Solow model without change to show the effect of this event on the country's total output technological and per capita output over time. Assume prior to this event the economy was on its steady state path.arrow_forwardWhat determines whether a curve shifts in the Solow diagram? Make a listof the parameters of the Solow model, and state whether a change in eachparameter shifts a curve (which one?) or is simply a movement along bothcurves.arrow_forward
- 1. Consider an economy that operates under competitive markets and meets the assumptions of the Solow model. The production function is given as follows: Y(t) = K (t) 0.3 (A(t)L(t)) ⁰.7 Assume a saving rate of 15%, labor force growth rate of 2% and depreciation rate of 5% and effectiveness of labor growth rate of 8%. a. Show that the production function exhibit constant return to scale? b. Derive the production function for output per capita. c. Derive the production function for output per effective unit of labor. d. Find equilibrium real wage as a function of capital per unit of effective labor and effectiveness of labor. e. Find equilibrium real rental price of capital as a function of capital per unit of effective labor and effectiveness of labor. f. Solve for steady state level of capital per unit of effective labor. g. Find steady state level of output per unit of effective labor. h. Find growth rate of output and output per worker on the balanced growth path. i. Which one would…arrow_forwardWhy is the Malthusian model no longer regarded as an explanation for modern economies? What are the main differences between the Malthusian and the Solow models?arrow_forwardConsider an economy that begins in a steady-state. Then an asteroid destroys two third of the capital stock. Using Solow model, draw a graph to explain how the economy behaves over time. Draw another graph indicating how output progresses over time, and demonstrate what happens to the level and growth rate of per capita GDP. By how much does the output decline when the capital stock falls by two third? Please include a description of what's happening on the graphs.arrow_forward
- Consider the Solow Model. Suppose a country enacts a tax policy that discourages investment, and the policy reduces the investment rate immediately and permanently from sbar to sbarprime . Assuming the economy (and hence the initial capital stock) is ABOVE its initial steady state (note: this is different from the standard case where we start at the intial steady state), use the Solow diagram to explain what happens to the economy over time and in the long run. Draw a graph showing how output evolves over time (put Y_t on the vertical axis with a ratio scale and time on the horizontal axis), and explain what happens to economic growth over time.arrow_forwardWe have an innovation-based Schumpeterian model in which productivity and aggregate output growth are driven by product improvements, which are driven in turn by spending on Research and Development (R&D). However, as the economy becomes larger, and more technologically advanced, it becomes more complex.arrow_forwardAssume Mexico has the production possibilities to produce either 50 bottles of milk or 50 cartons of eggs using 100 worker hours. If Mexico decides to produce 30 bottles of milk, how many cartons of eggs can it produce? Place the moveable point at the coordinate that shows this production possibility. Make sure that the point's coordinates are exactly correc t.arrow_forward
- Long run economic growth a) An economy is in its steady-state. According to the Solow model, what will happen to output per worker if the saving rate were to increase? Draw a diagram to illustrate. b) According to the Solow model, an increase in the saving rate is not always desirable. Why not? c) In the world economy, we see a great disparity of income per person. Yet the Solow model predicts conditional convergence – that poor countries will grow faster than rich countries and eventually converge to the same level of income per person as the rich countries. According to the Solow model, what conditions must be met for convergence to occur?arrow_forwardWhy is Solow Model important for any Economy?arrow_forwardTake the Solow model without technological change. Assume there is a government that taxes consumer's income at the tax rate t. The government uses the tax receipts to buy some of output. Assume that individuals save a fixed fraction, s, of their after tax income so St=s(1-t)Yt. (In this case, the government spending, g = TY). Show graphically that an increase in the tax rate will lower the steady state capital stock of an economy. Solve algebraically for the steady state capital stock.arrow_forward
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