A) Explain why the steady state growth rate is independent of the savings rate in the...

A) Explain why the steady state growth rate is independent of the savings rate in the Solow growth model?

B) Suppose two economies A and B exhibit the same exogenous growth rate of the labour force. There is no technical progress and the savings propensities are the same in both economies. The initial capital stock in country A is much larger than that of country B. Compare the transitional dynamics and the steady state growth paths of the two economies.

Solutions

Expert Solution

A) savings rate is an endogenous factor in Solow model. Tt means that there is diminishing returns to capital. high savings rate increases capital, however, if capital keeps on increasing, then it gives diminishing returns. ultimately there reaches a point where there is no growth in capital accumulation. Hence, savings rate cannot forever increase the rate of growth. So steady state level is independent of rate of savings

B) The two countries are identical in labor growth rate and savings propensities. There is no technical progress. So, they may have the same level of steady state of capital. Capital stock is larger in A than B. then, if both countries are below the identical steady state level, then country B will have a higher growth rate than country A due to lower capital stock. If both countries are above their steady states, then country A will have a higher magnitude of negative growth rate. In the third case, if country A is above steady state level and country B is below steady state level, then B will resgister positive growth rate and A will register negative growth rate.

Rahul Sunny answered 2 months ago

Next > < Previous

Related Solutions

Solow Country in steady state Savings rate of this country were to increase, name the effects...

Solow Country in steady state Savings rate of this country were to increase, name the effects of capital labor ratio & real GDP per capita? Population growth is experiencing decrease, what impact would this have on the capital-labor ratio, real GDP growth and real GDP per capita?

In the basic Solow model, an economy in a steady state has an economic growth rate...

In the basic Solow model, an economy in a steady state has an economic growth rate equal to a. The depreciation rate b. The savings rate c. The marginal product of capital d. Zero 2. Long time lags in the implementation of monetary policy a. Reduce the ability of the Fed to manage the economy b. Enhance the ability of the Fed to manage the economy c. Reduce the monetary base d. Increase the monetary base 3. An important principle...

Beginning from a steady state in the Solow growth model, explain how an increase in the...

Beginning from a steady state in the Solow growth model, explain how an increase in the savings rate will affect the levels and growth rates of capital and output per worker?

A) If an economy is in a steady state with no population growth or technological change...

A) If an economy is in a steady state with no population growth or technological change and the marginal product of capital is greater than the depreciation rate: steady-state consumption per worker would be higher in a steady state with a higher saving rate. steady-state consumption per worker would be higher in a steady state with a lower saving rate. the depreciation rate should be decreased to achieve the Golden Rule level of consumption per worker. the economy is following...

Consider an economy in steady state (or on a “balanced growth path”)without population growth. Suppose that...

Consider an economy in steady state (or on a “balanced growth path”)without population growth. Suppose that a mysterious new disease (COVID-19) suddenly kills half of the population. We are interested in the effect this likely has on kapital and output per person , both in the short and the long run. How will this affect in the Solow-model? Show with a graph

The historical growth of a steady-state economy would appear on a graph as... Linear growth Logistic...

The historical growth of a steady-state economy would appear on a graph as... Linear growth Logistic growth Exponential growth Exponential decline Logistic decline 13. The concept of a steady-state economy would involve all of the following except… Limits on material consumption Meeting basic needs such as food, housing, and medical care Growth in services, arts, communications, and education Compulsory population control Maintenance of ecosystem functions Which one of the following statements about the Global Environmental Facility is false? A principle...

According to the Solow model of growth, growth, in the long run (the steady-state), determine only...

According to the Solow model of growth, growth, in the long run (the steady-state), determine only by growth in technology. However, in the Solow model, there is nothing about how technology determined. 1. What factors do you think might affect technology in the long run? 2. Justify your answer and explain the implications to the growth in the long run.

a) Explain how and why an increase in the level of savings affects the long-run growth...

a) Explain how and why an increase in the level of savings affects the long-run growth of real income. b) Explain the role of diminishing returns, and what this implies for relative growth rates across countries. c) Carefully describe and explain one government policy that could increase the long-run growth of real income. NO HANDWRITING PLEASE! Please provide the explanations and graphs in text/word formate. Thanks in advance.....

Assume that Macro lakes is at the Steady State. Using the illustration of the Solow Growth...

Assume that Macro lakes is at the Steady State. Using the illustration of the Solow Growth Model, explain what happens to the Steady State values if foreign workers immigrate to Macro lakes. Fully label your figure

Solow growth model: steady state. What does it mean for the economy to be in the...

Solow growth model: steady state. What does it mean for the economy to be in the steady state? How is the steady state determined? How does steady-state output per person depend upon the investment and depreciation rates? Explain why an increase in the investment rate raises steady-state y. What are the effects of a rise in TFP or a fall in the rate of depreciation on steady-state y?

Subjects