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Unformatted text preview: Econ 3900 Prof. Grace O 1 Practice Questions Chapter 8 1. Assume that a country's production function is Y = AK 0.3 L 0.7 . The ratio of capital to output is 3, the growth rate of output is 3 percent, and the depreciation rate is 4 percent. Capital is paid its marginal product. a. What is the marginal product of capital in this situation? ( Hint: The marginal product of capital may be computed using calculus by differentiating the production function and using the capital-output ratio or by using the fact that capital's share equals MPK multiplied by K divided by Y .) b. If the economy is in a steady state, what must be the saving rate? ( Hint: The saving rate multiplied by Y must provide for gross growth of ( + n + g ) K , where is the depreciation rate.) c. If the economy decides to achieve the Golden Rule level of capital and actually reaches it, what will be the marginal product of capital? d. What must the saving rate be to achieve the Golden Rule level of capital? 2. The Solow model with population growth and labor-augmenting technological progress predicts balanced growth in the steady state. Growth rates of which variables are predicted to be balanced (i.e., will be equal) in the steady state? 3. What is the difference between convergence and conditional convergence with respect to predictions of the Solow growth model? Explain. 4. Suppose a government is able to permanently reduce its budget deficit. Use the Solow growth model of Chapter 8 to graphically illustrate the impact of a permanent government deficit reduction on the steady-state capital-labor ratio and the steady-state level of output per worker....
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- Fall '08