{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

381 Ch 7 - CHAPTER 7 Economic Growth I Questions for Review...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Questions for Review 1. In the Solow growth model, a high saving rate leads to a large steady-state capital stock and a high level of steady-state output. A low saving rate leads to a small steady- state capital stock and a low level of steady-state output. Higher saving leads to faster economic growth only in the short run. An increase in the saving rate raises growth until the economy reaches the new steady state. That is, if the economy maintains a high saving rate, it will also maintain a large capital stock and a high level of output, but it will not maintain a high rate of growth forever. In the steady state, the growth rate of output (or income) is independent of the saving rate. 2. It is reasonable to assume that the objective of an economic policymaker is to maximize the economic well-being of the individual members of society. Since economic well-being depends on the amount of consumption, the policymaker should choose the steady state with the highest level of consumption. The Golden Rule level of capital represents the level that maximizes consumption in the steady state. Suppose, for example, that there is no population growth or technological change. If the steady-state capital stock increases by one unit, then output increases by the marginal product of capital MPK ; depreciation, however, increases by an amount δ , so that the net amount of extra output available for consumption is MPK δ . The Golden Rule capital stock is the level at which MPK = δ , so that the marginal product of capital equals the depreciation rate. 3. When the economy begins above the Golden Rule level of capital, reaching the Golden Rule level leads to higher consumption at all points in time. Therefore, the policymaker would always want to choose the Golden Rule level, because consumption is increased for all periods of time. On the other hand, when the economy begins below the Golden Rule level of capital, reaching the Golden Rule level means reducing consumption today to increase consumption in the future. In this case, the policymaker’s decision is not as clear. If the policymaker cares more about current generations than about future gen- erations, he or she may decide not to pursue policies to reach the Golden Rule steady state. If the policymaker cares equally about all generations, then he or she chooses to reach the Golden Rule. Even though the current generation will have to consume less, an infinite number of future generations will benefit from increased consumption by moving to the Golden Rule. 57 C H A P T E R 7 Economic Growth I
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4. The higher the population growth rate is, the lower the steady-state level of capital per worker, and therefore there is a lower level of steady-state income per worker. For example, Figure 7–1 shows the steady state for two levels of population growth, a low level n 1 and a higher level n 2 . The higher population growth n 2 means that the line rep- resenting population growth and depreciation is higher, so the steady-state level of cap- ital per worker is lower.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern