EC202 PS5solution

EC202 PS5solution - Fall 2015 EC202 Section D Problem Set 5...

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Fall 2015 - EC202 Section D - Problem Set 5 Textbook Questions Chapter 12 Question 4 For each of the economic changes listed in (a) and (b), assess the likely impact on the growth rate and the level of output over the next five years (the initial impact) and over the next five decades (the long-run adjustment to the balanced-growth path). a. A permanent reduction in the rate of technological progress. Solution: The growth rate of output per worker falls in the short run and continues to fall over time. In the long run, the growth rate approaches a new steady state with a permanently lower (but still positive) growth rate. Total output per worker continues to rise over time, just at a slower rate. b. A permanent reduction in the savings rate. Solution: A permanent reduction in the saving rate has no affect on the steady-state growth rate of output per worker. The growth rate of output per worker falls (but remains positive) in the short run but in the long run it approaches its original steady-state rate. Chapter 12 Question 6 Suppose that the economy’s production function is Y = K AN that the savings rate s is equal to 16% and that the rate of depreciation δ is equal to 10%. Suppose

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