Consider the Solow growth model with no population growth and no tech- nology growth, i.e., n = x = 0. Output is created by a Cobb-Douglas pro- duction function combining Labor, Lt, and capital, Kt, such that output Yt is given by Y₁ = A+ KL-a Recall that, without population growth, Lt = = = Ao and Lo and assume that Lo 10. Furthermore, recall that, without technology growth, At assume that A0 = 2. Assume that the savings rate is s = 0.2, the depre- Ao ciation rate is = 0.1, and that the capital share is a = 0.3. A lower case letter denotes a variable in per capita. For example, kt: Kt/Lt. In the : = following questions, choose the closest number. What is the value of kss? (a) 72 (b) 27 (c) 7.2 (d) 2.7
* PRACTICE *
- What is the value of kss?
(a) 72
(b) 27
(c) 7.2
(d) 2.7
-What is the value of Yss for the Economy descibed?
(a) 36
(b) 3.6
(c) 2.7
(d) 27
- Suppose that the economy described in Question 7 economy starts with K0 = 10. Choose the correct one for the change in capital over time.
(a) fall
(b) grow
(c) Once dropped, it grows
(d) unchange
Suppose that the economy described was at its steady state level of capital Kss when it is hit by a war, such as the one in Ukraine. After the end of the war the economy must start a new with K0 = 0.8×Kss. Compute K1 for one year after.
(a) 53
(b) 9
(c) 101
(d) 59
-Now consider growth, Suppose that x = 0.1 and that n = 0.02, i.e.,
At = (1 + 0.1) At−1, and Lt = (1 + 0.02)Lt−1.
The other parameters should be the same. What is capital per eciency units in steady state?
(a) 0.65
(b) 6.5
(c) 1.3
(d) 50
Step by step
Solved in 2 steps
