Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 5, Problem 5E
(a)
To determine
The impact of the generous foreign aid to the Solow model economy.
(b)
To determine
The impact of the generous foreign aid to the Solow model economy at steady state.
(c)
To determine
The possible consequences of the foreign aid.
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Consider a Solow economy that begins with capital stock equal to $200 billion, and suppose its
steady-state level of capital is $400 billion. Now suppose this economy receives a gift of foreign aid
in the form of $100 billion worth of capital.
(a) Use the Solow model to explain what happens to capital per worker, output per worker, and
consumption per worker, both immediately and over time in this economy.
a)
(b) Suppose instead of starting below its steady state, the economy begins in steady state with
capital equal to $400 billion. Answer part (a) for this case.
point)
(c) In this example, does foreign aid have a long-run effect on the welfare of poor countries? (1
pol)
The amount of education the typical person receives varies substantially among countries. Suppose you were to compare a country with a highly educated labor force and a country with a less educated labor force.Assume that education affects only the level of the efficiency of labor. Also assume that the countries are otherwise the same: they have the same saving rate, the same depreciation rate, the same population growthrate, and the same rate of technological progress. Both countries are described by the Solow model and are in their steady states. What would you predict for the following variables?
a)The real wage.
The amount of education the typical person receives varies substantially among countries. Suppose you were to compare a country with a highly educated labor force and a country with a less educated labor force.Assume that education affects only the level of the efficiency of labor. Also assume that the countries are otherwise the same: they have the same saving rate, the same depreciation rate, the same population growth rate, and the same rate of technological progress. Both countries are described by the Solow model and are in their steady states. What would you predict for the following variables?a. The rate of growth of total income.b. The level of income per worker.c. The real rental price of capital.
Chapter 5 Solutions
Macroeconomics (Fourth Edition)
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- The amount of education the typical person receives varies substantially among countries. Suppose you were to compare a country with a highly educated labor force and a country with a less educated labor force. Assume that education affects only the level of the efficiency of labor. Also assume that the countries are otherwise the same: they have the same saving rate, the same depreciation rate, the same population growth rate, and the same rate of technological progress. Both countries are described by the Solow model and are in their steady states. What would you predict for the following variables? a. The rate of growth of total income. b. The level of income per worker. c. The real rental price of capital. d. The real wage.arrow_forwardQuestion 4:a. Identify two assumptions of the basic Solow Growth Model. b. Why are these assumptions important in supporting the Solow Model? c. You are given the following information about an economy.Y = C + IY = F(K, L)The aggregate production function for this economy exhibits constant returns to scale and the marginal products of labor and capital are both subject to diminishing returns.s = saving rate (assume this is constant) per yearδ= depreciation rate (assume this is a constant) per yeary = Y/Lk = K/Lk* = steady state of capital per worker (K/L) and sf(k) < δk.i. What is sf(k)? ii. What is δk?iii. Interpret the meaning of sf(k) < δk? iv. Graphically illustrate sf(k), δk, and k*. Indicate on your graph where sf(k) < δk.v. Explain what happens in this economy when sf(k) < δk.arrow_forwardTechnical Progress in the Solow Model Suppose an economy that follows the assumptions of the Solow model saves a proportion s of its income every period, population grows at rate n, capital depreciates at rate d, and technical progress takes place at rate g. Assume it is not yet at steady state. a) Draw a graph to show initial level of capital k* < kss, output y* as well as the steady state levels of each. Be sure to draw and label the production function, investment and the line of effective depreciation, as well as k*, y*, kss and yss b) Explain what will happen to y* in the short run given this information (i.e. starting where k* < kss), according to the assumptions of the Solow growth model). c)At steady state, what is the growth rate of y*, y and Y? Explain your answersarrow_forward
- Question 3 Consider the steady state of the Solow model with population growth and technological progress. (a) Use a graph to show what happens to steady-state capital per effective worker and output per effective worker in response to a decrease in the depreciation rate (?). Explain your answer. (b) Use a graph to show what happens to steady-state capital per effective worker and output per effective worker in response to a decrease in the population growth rate (?). Explain your answer. (c) Briefly explain any differences between the growth rate of output per worker (?⁄?) in the steady state when comparing your answers to parts (a) and (b). Define the steady state.arrow_forwardan economy is described by the Solow-Swan model with the following variables, E(t)=1 The saving rate is 0.41 per year. Labor's share of income is 0.44. The growth rate of labor efficiency is 0.03 per year. The growth rate of the labor force is 0.02 per year Depreciation is 0.09 per year. calculate the steady-state value of the capital-to-labor ratio, K/L Enter your answer to two places after the decimal.arrow_forwardConsider two countries (A and B) identical in everything except that country A has higher capital. According to the Solow model, which of these statements is true? A Country A will grow as fast as country B and will end up with a higher equilibrium capitalK* B. Country A will grow faster than country B and will end up with the same equilibrium capital K C. Country A will grow as fast as country B and will end up with a lower equilibrium capital K* D. Country A will grow slower than country B and will end up with the same equilibrium capital K* cheik piearrow_forward
- Why 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_forward9) In the basic Solow model, suppose that Y = AK"N'-a,without population growth and technological progress. In this economy, long run growth in the level of GDP is possible if a) a > 0 and sA-d>0 b) a = 0 and sA-d>0 c) a = 1 and sA-d>0 d) a =1 and sA-d<0arrow_forwardYou 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_forward
- Identify two assumptions of the basic Solow Growth Model. b. Why are these assumptions important in supporting the Solow Model? c. You are given the following information about an economy.Y = C + IY = F(K, L) The aggregate production function for this economy exhibits constant returns to scale and the marginal products of labor and capital are both subject to diminishing returns.s = saving rate (assume this is constant) per yearδ= depreciation rate (assume this is a constant) per yeary = Y/Lk = K/Lk* = steady state of capital per worker (K/L) and sf(k) < δk.i. What is sf(k)? ii. What is δk? iii. Interpret the meaning of sf(k) < δk? iv. Graphically illustrate sf(k), δk, and k*. Indicate on your graph where sf(k) < δk. v. Explain what happens in this economy when sf(k) < δk.arrow_forward(a) Explain the role of capital, labor, and technology in the Solow growth model. (b) Illustrate the steady-state equilibrium in the Solow growth model using a graph, and explain how changes in the savings rate and technological progress affect the steady-state equilibrium. 2. Consider an economy with the following production function: Y = K^0.3 * (AL)^0.7, where Y is output, K is capital, L is labor, and A is the level of technology. (a) Calculate the marginal product of capital (MPK) and the marginal product of labor (MPL). (b) If the capital stock (K) is 100, the labor force (L) is 200, and the level of technology (A) is 2, find the level of output (Y) in this economy. 3. Suppose there is a negative demand shock that causes the aggregate demand equation in an economy to change from: AD1: Y = 2000 - 100P to AD2: Y = 1800 - 100P The aggregate supply equation is given by: AS: Y = 400 + 50P (a) Calculate the initial equilibrium price level (P1) and real output (Y1)…arrow_forwardUse the Solow model below to answer the question. Y Y3 Y₂ Y₁ K₁₁ K₂ K3 Y = Af(K,H) dk SY K Suppose that Y₁ is 1,475, Y₂ is 6,184, and Y3 is 10,992. The savings rate for this economy is 30% and the depreciation rate is 8.2%. If this economy is currently at a GDP of 1,475, what is the smallest amount of foreign aid which would move the economy up to a GDP of 10,992? Assume that all foreign aid becomes investment. Round your final answer to two decimal places.arrow_forward
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