EBK MACROECONOMICS
10th Edition
ISBN: 9780134896571
Author: CROUSHORE
Publisher: VST
expand_more
expand_more
format_list_bulleted
Question
Chapter 6, Problem 3AP
a
To determine
To plot: The graphical representation of steady state for initial level of government purchase.
b)
To determine
To find: The effects on the steady state levels of capital per worker, output per worker, consumption per worker.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose that the economy of Santa Cruz County follows the equations of the Solow
model. It has an investment rate of 0.6 and a depreciation rate of 0.2, and an
aggregate production function
Y=4K(1/4)
In the year 2019 the economy is in steady state. But in 2020 the CZU wildfire destroys
50% of the capital stock (so K2020= 0.5 K2019). Assuming the economy returns to its
usual growth dynamics after that, what would the growth rate of GDP from 2020 to
2021?
Write your answer in percentage points and round to 1 decimal place (e.g. 4.2 would
mean 4.2% growth from 2020 to 2021).
Part 2. Multiple equilibria in the Solow Model
Consider again the economy of Avataria, which can be described by the Solow model. Avataria has
the old depreciation rate of 8% and the production function as in part (d),
Y(K,L)=10(K)¹/2 (L) 1/2,
and its investment rate is equal to its saving rate. However, now Avataria has two saving rates:
saving rate is equal to 8%, if the income per capita is below 160,
saving rate is equal to 16%, if the income per capita is above 160.
(e) What will be the steady-state output per capita in Avataria, if its initial capital-
labor ratio is 200? Calculate the exact value.
●
●
(f) What will be the steady-state output per capita in Avataria, if its initial capital-
labor ratio is 361? Calculate the exact value.
(g) In which case, (e) or (f), do you expect Avataria to have a faster initial growth rate?
Explain.
only part d solution is needed
Knowledge Booster
Similar questions
- Suppose an economy is described by the Solow model and output is produced using a Cobb-Douglas production function: = K (A₁ Lt)¹-a In per worker terms the production function can be written as: Y₁ Kt ¥ - (K)* 4-² = Lt Lt Assume that g = 0 and therefore A can be normalized to 1. Suppose the savings behavior is different from what we assumed in class. In particular, below a minimum level of output per worker, people cannot save at all because all of the income is used for survival. Above this income level, people are saving a constant fraction of additional income earned beyond. Ý₁ Lt (a) Show what this means for the evolution of the capital stock per effective worker if output is below Lt' Y₁ (b) Show graphically that in this economy it is (technically) possible to have one, two or three different steady states. For each of the steady states that you identify (in each of the three cases) briefly discuss if the steady states are (locally) stable.arrow_forward] 31 = J Consider a Solow model in discrete time. The following system of equations fully describes the model economy: Ct + It = Yt Kt+1 = (18)Kt + It It = SYt Y₁ = AK¤(Z₁N₁){¹-a} Where Ct is consumption in period t, It is investment in period t, Y is output in period t, Kt is capital in period t, N₁ is labour force at time t, Zt is labour augmenting technology at time t, & is the depreciation rate, s is the saving rate; A is total factor productivity in period t. Assume that Nt+1 (1 + n)Nt and Zt+1 (1+z)Zt, where 0 < n < 1 and 0 < z < 1. Denote kt = Kt/ZtNt the level of capital per efficient labour. A) Derive the expression of the growth rate of capital y = (kt+1 − kt)/kt. B) How does a one-off permanent increase in the saving rate s affect output and consumption in the steady-state? Explain. C) Derive and explain the intuition behind the steady-state level of capital per efficient workers in terms of the model parameters. How the level of capital per efficient worker would change…arrow_forward3. Suppose that we have a Solow model with one twist. The twist is that thereis a government. Each period, the government consumes a fraction of output,sG. Hence, the aggregate resource constraint is:Yt = Ct + It + Gt.Where Gt = sGYt. Define private output as Ypt = Yt − Gt. Suppose thatinvestment is a constant fraction, s, of private output (consumption is then1 − s times private output). Otherwise the model is the same as in the text.104(a) Re-derive the central equation of the Solow model under this setup.(b) Suppose that the economy initially sits in a steady state. Suppose thatthere is an increase in sG that is expected to last forever. Graphicallyanalyze how this will affect the steady state value of the capital stockper worker. Plot out a graph showing how the capital stock per workerwill be affected in a dynamic sensearrow_forward
- With lockdowns currently imposed across Europe and North America until mid-April, even in the best-case scenario it will take at least until mid-June for market confidence to be restored in these economies. The implication is that nearly six million workers in Bangladesh’s formal sector – which is largely manufacturing – will be without steady work for an extended period.” a) Which part of the production function do you think the issue mentioned above will affect? Draw two diagrams to show Real GDP and LRAS is affected in the long run. The government should also consider an unconditional cash transfer program for an initial period of three months at a rate of $95 per month, which corresponds to the minimum wage for the formal sector in Bangladesh. This would cost the government roughly $14 billion, or 4% of GDP. While this sort of cash transfer program always suffers from targeting issues, Bangladesh enjoys a highly sophisticated mobile financial services network, which could…arrow_forwardPls solve asaparrow_forwardIn the Romer model, if an economy's share of researchers decreases, there will be A) an immediate decrease in output and output growth will slow. B) an immediate increase in output and output growth will slow. C) an immediate increase in output and output growth will accelerate. D) an immediate decrease in output and output growth will accelerate. E) no change in output but output growth will slow.arrow_forward
- 51) In the absence of technological progress, we know with certainty that an decrease in the saving rate will cause which of the following? A) decrease steady state consumption B) increase steady state consumption C) have no effect on steady state consumption D) decrease steady state consumption only if the decrease in saving exceeds the increase in depreciation E) decrease steady state consumption only if the decrease in saving is less than the decrease in depreciation 52) As an economy adjusts to an decrease in the saving rate, we would expect output per worker A) to decrease at a constant rate and continue decreasing at that rate in the steady state. B) to decrease at a permanently higher rate. C) to increase at a permanently higher rate. D) to return to its original level. E) none of the above 53) Suppose the following situation exists for an economy: Kt+1/N t/N. Given this information, we know that A) saving per worker equals depreciation per worker…arrow_forwardI need help with both questions and please provide justificationarrow_forwardAssume that the production function for a country is given by Y = √K and annual investment is given by the function I = √ × Y where 0.320, and that the yearly depreciation rate is 5.33%. Suppose that this year, the output in the country is 1, and a neighbor country's output is 50% higher. Calculate the time it would take for the country's output to catch up with its neighbor's output. Assume the neighbor country's economy is neither growing nor shrinking. yearsarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education