Question

Your role. You are an international development consultant who has been contracted by a country to provide advice on a strategy to increase long-run economic growth. The country’s current economic state. The country is currently in a stable economic situation. It’s income per capita has been growing at an almost constant but low rate for the last 10 years. Growth rate as well as the level of income per capita has been significantly lower than in neighbouring similar countries, which has made the government wonder if it would be possible to increase the rate of growth in the years to come. The average household expenditure in consumption is larger than in neighbouring similar countries while the population growth rate and capital depreciation rate are approximately the same. Your task as a consultant. The government would like to increase the growth rate of income per capita in the coming years to achieve a level of income per capita in the long run that is comparable to neighbouring similar countries. Three prestigious political leaders of the country have recommended three different policies to achieve the government’s objective. Your task is to choose the right policy for the country using the Solow Model to substantiate the arguments in favour of your choice and the arguments against the other two policy options. Policy proposals

• Political leader 1: “The government should implement a policy to permanently increase the population growth rate by, for example, improving child-care services and providing social-security payments that increase significantly when families have an additional child”.

• Political leader 2: “The government should implement a policy to incentivise consumption, so the proportion of disposable income allocated to consumption increases permanently”.

• Political leader 3: “The government should implement a policy to incentivise the population to increase the saving rate, so the proportion of disposable income allocated to saving increases permanently”. Instructions. Assume the country’s economy is currently at steady state.

a. Indicate which policy option is the best strategy to achieve the country’s economic objectives.

b. Use the Solow Model without technology to explain your answer in point (a) above. Write your answer in no more than 200 words and use the Solow Diagram to illustrate.

c. Use the Solow Model without technology to explain why the other two policy options (the two policy options you did not choose in point (a) above) are not recommendable to achieve the government’s objective. Use the Solow Diagram to illustrate your argument against each of these two policies.

Answer 1