Problem 2In class, we argued that if people could accumulate human as well as physicalcapital, the production function would look like the "AK" production function.(a) If the production function is AK and the savings rate is constant at rate "s",and the rates of depreciation and population growth are 8 and n respectively, whatwould the growth rate of the economy be?(b) What would be the macroeconomic consequences of increasing the savingsrate in this economy? Explain using the model and intuitively.(c) What would be the consequences of an increase in fertility in this economy?Are these consequences good or bad? Is this answer unambiguous?(d) How are human and physical capital different from one another in the waythey evolve from period to period?(e) Does human capital have an upper limit? If it does, what is the resultingproduction function when this is reached and the growth rate of the economy? Ifit doesn't have a limit, what is the resulting growth rate of output as it increases?(f) Assume country A's economic growth can be modelled by a neoclassicalgrowth model (i.e., all the neoclassical assumptions hold). Country A'sgovernment is looking to grow the economy. They claim that they can make itgrow forever by accumulating both human and physical capital at the same timeas this combination will allow them to avoid diminishing returns. Is country A'sgovernment correct? If so, why? If not, what is a better alternative? Make sure toreference the Neoclassical assumptions to answer this question.

In class, we argued that if people could accumulate human as well as physical capital, the production function would look like the "AK" production function. (a) If the production function is AK and the savings rate is constant at rate "s", and the rates of depreciation and population growth are 8 and n respectively, what would the growth rate of the economy be? (b) What would be the macroeconomic consequences of increasing the savings rate in this economy? Explain using the model and intuitively. (c) What would be the consequences of an increase in fertility in this economy? Are these consequences good or bad? Is this answer unambiguous?

In class, we argued that if people could accumulate human as well as physical capital, the production function would look like the "AK" production function. (a) If the production function is AK and the savings rate is constant at rate "s", and the rates of depreciation and population growth are 8 and n respectively, what would the growth rate of the economy be? (b) What would be the macroeconomic consequences of increasing the savings rate in this economy? Explain using the model and intuitively. (c) What would be the consequences of an increase in fertility in this economy? Are these consequences good or bad? Is this answer unambiguous?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter20: Economic Growth

Section: Chapter Questions

Problem 12SCQ: Why dues productivity growth in high-income economies not slow down as it runs into diminishing...

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Question

Problem 2
In class, we argued that if people could accumulate human as well as physical
capital, the production function would look like the "AK" production function.
(a) If the production function is AK and the savings rate is constant at rate "s",
and the rates of depreciation and population growth are 8 and n respectively, what
would the growth rate of the economy be?
(b) What would be the macroeconomic consequences of increasing the savings
rate in this economy? Explain using the model and intuitively.
(c) What would be the consequences of an increase in fertility in this economy?
Are these consequences good or bad? Is this answer unambiguous?
(d) How are human and physical capital different from one another in the way
they evolve from period to period?
(e) Does human capital have an upper limit? If it does, what is the resulting
production function when this is reached and the growth rate of the economy? If
it doesn't have a limit, what is the resulting growth rate of output as it increases?
(f) Assume country A's economic growth can be modelled by a neoclassical
growth model (i.e., all the neoclassical assumptions hold). Country A's
government is looking to grow the economy. They claim that they can make it
grow forever by accumulating both human and physical capital at the same time
as this combination will allow them to avoid diminishing returns. Is country A's
government correct? If so, why? If not, what is a better alternative? Make sure to
reference the Neoclassical assumptions to answer this question.

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