Economic Growth 1. Consider a Solow economy without population growth as described in Chapter 8 of Mankiw, but let the specific production technologv be described by YAK1/3[2/3. Suppose it begins with a capital stock equal to $300 billion, and suppose its steady-state level of capital is equal to $500 b the form of $100 billion worth of capital (electric power plants, machine tools, etc.) illion. To its pleasant surprise, the economy receives a generous gift of foreign aid in (a) What happens to the economy immediately? What happens over time? By what pro- ortion does consumption per person initially increase? What happens to consumption in the long run! There is an immediate rise of K to $400 billion. Since it is now closer to the steady state, the economy and capital stock will grow more slowly than before. Consumption increases by the ratio (400 /30011/3, or 10%. Long-run consumption won't change at all (b) Suppose instead of starting below its steady-state, the economy begins in steady-state, with a capital stock equal to $500 billion. Answer part (a) in this case . Consumption immediately increases by 1600/ 5001 = 3 = 6.3% and then starts de- clining. In the long run, nothing changes

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A:

Economic Growth

It means the rise in the manufacturing levels of a country’s products/services over a while. It is calculated in terms of the real income of the people of the country. When the production of products/services begins, the manufacturers will hire employees, which in turn raises the income of the people and it will also raise the buying power, this eventually leads to the circulation of money that directly helps in the increase in the Gross Domestic Product (GDP). Thus, GDP is calculated by economists to calculate the growth in the country.