SOLOW QUESTIONS.docx Only question no 1 to 10 are required to be answered.In answering questions 1-10, use the following information about the economy of Margaritaville.

Margaritaville’s production function per effective worker is given by the following expression:

y’ = (k’)0.5, where y’ = Y/(E×L) and k’ = K/(E×L). Y is real output, and K is the stock of capital.

The rate of depreciation is 2 percent (δ = 0.02). L is the size of the labor force which grows at the

rate of 1 percent per year (g = 0.01); and E is a coefficient describing the efficiency of labor

which grows at the rate of 2 percent per year (σ = 0.02). In sum, Magaritaville has a savings rate

of 25 percent, a depreciation rate of 2 percent, a population growth rate of 1 percent, and a rate of

labor-augmenting technological change of 2 percent.

CIRCLE T to indicate that the corresponding statement is TRUE; CIRCLE F to indicate the

statement is FALSE.

T

F 1. In the steady-state of this economy, Margaritaville’s real gross domestic product

per capita is growing at a rate of 2 percent per annum.

T

F 2. In the steady-state of this economy, the marginal product of capital per effective

worker (MPK) is equal to 0.10.

T

F 3. The steady-state level of capital per effective worker in Margaritaville is equal to

20.

T

F 4. At the Golden-rule steady-state level of capital, the marginal product of capital per

effective of worker is equal to 0.05.

T

F 5. A government interested in maximizing consumption per worker should increase

the savings rate to 50 percent by using fiscal policy.

T

F 6. If the population growth rate decreases, the growth rate of output per worker will

increase.

T

F 7. If Margitaville’s growth rate in labor-augmenting technological increases from 2

percent to 3 percent, then the growth rate in real gross domestic product per capita

will increase from 2 percent to 3 percent, as well.

T

F 8. If Margaritaville’s saving rate increases from 20 percent to 40 percent, the steadystate level of consumption per effective worker will increase.

T

F 9. In the steady-state of Margaritaville’s economy, output (Y) grows at a rate of 6

percent per year.

T

F 10. The government of Margaritaville could use tax policy to increase the savings rate

in order to increase consumption per worker.

1

NAME __________________

T

F 11. According to the discussion in class and in the readings, the quality of institutions,

particularly the protection of property rights, are a key determinant of economic

performance. (read pages 228-230 of chapter 8 of Mankiw which is available on

BRIGHTSPACE).

T

F 12. According to the Solow growth model, the economy automatically converges to

the steady-state level of capital per effective worker.

T

F 13. According to the Solow growth model, the fact that the average growth rate in

real gross domestic product per capita for the United States between 1900 and 2010 is

approximately 2.2 percent suggests that, the average growth rate in labor augmenting

technological change is approximately 2.2 percent per year.

T

F 14. According to the Solow growth model, real GDP per capita among countries

should converge. (read pages 221-222 of chapter 8 of the Mankiw which is available

on BRIGHTSPACE)

T

F 15. The evidence of the growth rates in real gross domestic product per capita among

developed and develop countries is consistent with the conditional convergence

prediction of the Solow growth model. (read pages 221-222 of chapter 8 of the

Mankiw which is available on BRIGHTSPACE)

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