Two countries, Country A and Country B, are described by the Solow growth model. Both countries are identical, except that the rate of labor-augmenting technological progress is higher in A than in B. i. In which country is the steady-state growth rate of output per effective worker higher? ii. Does the Solow growth model predict that the two economies will converge to the same steady state?
(a) Two countries, Country A and Country B, are described by the Solow growth model. Both
countries are identical, except that the rate of labor-augmenting technological progress is
higher in A than in B.
i. In which country is the steady-state growth rate of output per effective worker higher?
ii. Does the Solow growth model predict that the two economies will converge to the same
steady state?
(b) Based on the Solow growth model with population growth and labor-augmenting technological
progress, explain how each of the following policies would affect the steady-state level and
steady-state growth rate of total output per person:
i. an increase in the government’s budget deficit
ii. grants to support research and development
(c) Consider a Solow model where the production function no longer exhibits diminishing returns
to capital accumulation. Assume the production function is now Y = AK. What happens to
the growth rate of per capita
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
