Question

Consider the Romer economy with the following parameter values: A0=100, 6% of the workforce is employed in research sector, research productivity is z=1/3,000 and the workforce equals 1,000.

1. What is the initial level of output per person (in period 0)?

A. 114

B. 100

C. 102

D. 96

2. What is the level of output per person after 100 years? Pick the closest value

A. 996

B. 699

C. 681

D. 96

3. Suppose that adjustments to immigration policy lead to an increase in the workforce of 10% (to 1,100 workers). Calculate the new growth rate of output per worker.

A. 2%

B. 1.1%

C. 11%

D. 2.2%

4. How will the increase in L impact the Romer diagram?

A. In a ratio scale the function becomes exponential.

B. In a standard scale the line becomes linear.

C. In a ratio scale the line becomes steeper.

D. In a standard scale the line becomes steeper.

Answer 1

A_o= 100

Workforce in research sector, y_a= 6%= 0.06

Productivity,z= 1/3,000

Workforce, L= 1,000

1. d) Output per person is given by y= A_o(1-y_a) , which at time t_o is 100*0.94 = 94.

2. c) The growth rate of y in the long run will just be the growth rate of A.

A= z.y_a.L= (1/3000)*(0.06)*(1000) = 0.02. The economy grows 2% every year.

This value grows at 2% every year, so in 100 years it will be 94*(1.02)¹⁰⁰ = 681.

3. c) A= z.y_a.L= (1/3000)*(0.06)*(1100) = 0.022. The economy grows 2.2% every year.

4. C. In a ratio scale line becomes steeper.