Question

True or False and Explain

1.So long as technological growth and the share of income paid to capital are identical, in the long run the Solow model implies that countries will converge to the same steady state ratio of output per capita.

2.Rapid resolution of insolvent firms tends to slow the long-run growth of total factor productivity (TFP).

3.Improving creditors' rights typically boosts total factor productivity (TFP) over time.

4. Limiting government discretion can improve economic performance over time.

Answer 1

1. True

Neoclassical Growth Model

let

Nt = size of the labor force in year t

n = growth rate of the labor force

Kt = capital stock in year t

Yt = output produced in year t

It = gross investment in year t

Ct = consumption in year t

Assume a closed economy with no government so that Ct = Yt - It.

We want to understand how these variables change over time:

yt = Yt/Nt = output per worker

ct = Ct/Nt = consumption per worker

kt = Kt/Nt = capital stock per worker = capital-labor ratio

The steady state is a situation in which output per worker, consumption per worker, and capital per worker are constant. In the absence of productivity growth, an economy reaches a steady state in the long run with output growing at the population growth rate.

Let d = rate of depreciation

Kt/Nt is constant in the steady state. Therefore, Kt must grow at the same rate as Nt.

(1) It = (n + d)Kt in the steady state

(2) Ct = Yt - (n + d)Kt in the steady state

divide equation (2) by Nt

(3) c = f(k) - (n + d)k

(assume that an increase in k causes c to increase)

Let saving = St = sYt.

Goods market equilibrium requires St = It. This means that sYt = (n + d)Kt in a steady state. Dividing both sides by Nt gives

(4) sf(k) = (n + d)k in the steady state.

Equation (4) says that saving per worker equals investment per worker in the steady state. The value of k given by equation (4), k*, is the steady state capital-labor ratio.

2. False

Here focused on developments in total factor productivity (TFP).

here as that portion of real

output growth which is not acc es in inputs of labour and

capital, the two most fundamental factors of production. In this sense, TFP growth

is a measure of the gains in the efficiency of production, i.e. over the medium and

longer term it can be taken as a measure of technological progress.

3. False

Total factor productivity is affected by a huge variety of technological, economic, and cultural factors. Innovation, investment in more productive sectors, and economic policies aimed at liberalization and competition all boost TFP.

4. True

For much of the 20th century, governments adopted discretionary policies like demand management designed to correct the business cycle. These typically used fiscal and monetary policy to adjust inflation, output and unemployment.