Question

1. In the Solow model, if investment (I=sY) is lower than depreciation (dK), then….

A. Depreciation (dK) in the following period will be higher than in the current period.

B. Capital stock (K) in the following period will be lower than in the current period.

C. Per-capita GDP (y) in the following period will be the same as in the current period.

D. Overall GDP (Y) in the following period will be higher than in the current period.

Other:

2. Using the Solow diagram, suppose an economy is in the steady state, and suddenly the investment rate (s) decreases permanently, what will happen to the stock of capital and output?

A. The investment curve will shift downward, making the stock of capital and output fall.

B. The depreciation line will shift downward, making the stock of capital and output fall.

C. The investment curve will rotate upward, making the stock of capital and output increase.

D. The depreciation line will shift downward, making the stock of capital and output increase.

Other:

3. Using the Solow diagram, suppose the economy is in the steady state and the depreciation rate (d) decreases. What will happen to output (income)?

A. Output will be unaffected in the short and long run.

B. Income will fall but consumption will increase.

C. Consumption will increase but income will fall.

D. Output will increase over time toward a higher steady-state value.

Suppose the economy is at its steady state and there is a one-time inflow of immigrants that doubles the workforce (L). Draw on paper the Solow diagram and do the analysis before answering the following questions.

4. What effect will immigration have on the stock of capital (K) and GDP (Y) in the long run (i.e. at the new steady state)?

A. The capital stock K and Investment will double. But GDP Y and overall consumption C will remain unchanged.

B. Wages will be permanently lower because of immigration.

C. The capital stock K and GDP Y will double but overall consumption C will remain unchanged.

D. The capital stock K, GDP Y and overall consumption C will all double.

5. What effect will immigration have on per-worker capital (K/L) and per-worker GDP (Y/L) in the long run (i.e. at the new steady state)?

A. K/L will increase but Y/L will remain unaffected.

B. Y/L will increase but K/L will remain unaffected.

C. Both will remain unaffected i.e. same value in the old and new steady states for K/L and Y/L.

D. Both K/L and Y/L will decrease.

Answer 1

Answer 1: Option B. Capital stock (K) in the following period will be lower than in the current period.

As investment is lower than depreciation, addition to the capital stock is less than what it was in the previous period and this leads to decrease in the capital stock in the following period than in the current period.

Answer 2: Option A. The investment curve will shift downward, making the stock of capital and output fall.

A decline in investment permanently will shift the investment curve downwards and this leads to fall in the stock of capital and output in the economy.

Answer 3:

Answer 4;

Option d. The capital stock K, GDP Y and overall consumption C will all double. Increase in the population growth rate will double the level of consumption, GDP and capital in the long run.

Answer 5: D. Both K/L and Y/L will decrease.

It is depicted in the diagram above. Increase in population growth rate will reduce the level of both capital per capita and output per capita in the economy.