Question

Use the Solow growth model to answer the questions below. Suppose the depreciation rate of capital decreases in a permanent manner.

1. Explain the impact on capital per worker.

2. Explain the impact on output per worker.

3. Explain the impact on consumption per worker in the short run and the long run.

2. Use the Solow growth model to answer the questions below. Suppose the population growth rate decreases in a permanent manner.

1. Explain the impact on capital per worker.

2. Explain the impact on output per worker.

3. Explain the impact on consumption per worker

Answer 1

Solow Growth Model:

The Solow Growth Model uses an external cause to analyse the changes in the level of output in an economy which includes population growth rate, depreciation rate on capital, savings rate and rate of technological progress.

If the depreciation rate of capital decreases in a permanent manner:

Impact on capital per worker:

If the depreciation rate of capital decreases in a permanent manner the capital per worker will increase at a decreasing rate of depreciation.

Impact on output per worker:

If the depreciation rate of capital decreases in a permanent manner the output per worker increases with increase in investment per worker at a decreasing rate of depreciation.

Impact on consumption per worker in short run and long run:

The consumption per worker will decreases with the decreasing rate of depreciaiton on capital both in short and long run with the increase in output and investment per worker if the depreciation on capital decreases permanently.

If the Population growth rate decreases in the permanent manner:

Impact on capital per worker:

The capital per worker decreases if the population growth rate decreases in the permanent manner.

Impact on output per worker:

The output per worker will also decreases with the decreasing rate in population growth in the permanent manner.

Impact on consumption per worker in short run and long run:

The consumption per worker will decreases with the decrease in the population growth permanently both in short run and long run. But if the population growth rate remains constant the longrun consumption capital and output per worker will also remains constant.