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.
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.
F 2. In the steady-state of this economy, the marginal product of capital per effective
worker (MPK) is equal to 0.10.
F 3. The steady-state level of capital per effective worker in Margaritaville is equal to
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.
F 5. A government interested in maximizing consumption per worker should increase
the savings rate to 50 percent by using fiscal policy.
F 6. If the population growth rate decreases, the growth rate of output per worker will
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.
F 8. If Margaritaville’s saving rate increases from 20 percent to 40 percent, the steadystate level of consumption per effective worker will increase.
F 9. In the steady-state of Margaritaville’s economy, output (Y) grows at a rate of 6
percent per year.
F 10. The government of Margaritaville could use tax policy to increase the savings rate
in order to increase consumption per worker.
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
F 12. According to the Solow growth model, the economy automatically converges to
the steady-state level of capital per effective worker.
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.
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
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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