Question

Q#2: Answer to the following questions based on your knowledge and understanding of the Solow Growth model. (a) What are the equilibrium conditions of the Solow Growth model? How can it be used for policy analysis? (b) Define the steady-state equilibrium conditions of the Solow Growth model. In addition, supposed global warming speeds up the depreciation rate of capital. What will happen to the steady-state conditions of this model (will they rise, fall, or state unchanged)? The justification of your answer should include a graphical analysis of the Solow growth model and the impact of this event on this economy. (c) What policy recommendation would you give to the US federal government given the current economic situation in the US? Justify your answer. Make sure to include a graphical analysis of the Solow Growth model indicating the outcome of your policy recommendation in your answer.

Answer 1

Propounded by Robert Solow long term neo classical economic growth .It explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity( technological progress). At its core is a neoclassical (aggregate) production function is cobb douglas , thus make model connect with microeconomics .
Assumptions :
⦁   Production of single commodity
⦁   Output is calcuated in net terms after deduction of depriciation
⦁   labour and capital can be subsituted
⦁   price and wages are flexible
⦁   Full employment of labour
⦁   Constant return to scale
⦁   Constant saving ration
⦁   Factors of productions are paid according to their marginal productivity
⦁   neutral technical progress

K/L RATIO(CAPITAL AND LABOUR) adjust itself in long run in direction of equilibrium .If the initial ratio of capital to labour is more , capital and output would grow more slowly than labour and vice versa.
Y = F(K,L)
In case of constant return to scale aY= F(aK.aL)

In symbolic terms, it can be expressed as follows:
I = dk/ dt = sY
Where
S—Propensity to save
K—Capital Stock, so that investment I is equal
The growth rate of labour force is exogenously determined. It grows at an exponential rate given by
L = L0 ent
Where L—’Total available supply of labour.
n—Constant relative rate at which labour force grows.