EC202 PS4solution

EC202 PS4solution - Fall 2015 EC202 Section D Problem Set 4...

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Fall 2015 - EC202 Section D - Problem Set 4 Solutions Textbook Questions Chapter 11 Question 2 Consider the following statement: The Solow model shows that the savings rate does not affect the growth rate in the long run, so we should stop worrying about the low U.S. savings rate. Increasing the savings rate wouldn’t have any important effects on the economy. Explain why you agree or disagree with this statement! Solution: Disagree. An increase in the saving rate does not affect growth in the long run, but does increase growth in the short run. In addition, an increase in the saving rate leads to an increase in the long- run LEVEL of output per worker. Finally, since the evidence suggests that the U.S. saving rate is below the golden-rule rate, an increase in the saving rate would increase steady-state consumption per worker. Chapter 11 Question 7 This problem is based on the material in the chapter appendix. Suppose that the economy’s production function is given by Y = K α N 1 - α and assume that α = 1 3 . a. Is this production function characterized by constant returns to scale? Explain. Solution: Yes. To show this, just check it by multiplying the inputs with a factor z : ( zK ) 1 3 ( zN ) 2 3 = z 1 3 K 1 3 z 2 3 N 2 3 = zK 1 3 N 2 3 = zY b.
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