Question

This is a question in Macroeconomics about Solow Model

Consider an economy in discrete time t = 0,1,2,3,... Y denotes total output, C denotes total consumption, and S denotes total savings. At any period, total output is split between consumption and saving, i.e. Y() = C(t) + s(t) The economy is closed so that aggregate saving equals aggregate investment, S(t) = 1(t). Investment augments the national capital stock K and replaces that part of it which is wearing out. Suppose that a fraction of the capital stock depreciates at any period. Population is assumed to be constant over time and, like in the Solow model, everyone works. a. Write down an expression that links K(t+1) and K(t). The savings rate in this economy is given by s = 50 the capital-output ratio is given by 0 = 0 b. Use the expression you found in (a) and some algebra to show that 9+8, where g is the growth rate of output, YEYO c. In this model, do increases in the saving rate increase the level of output? Do they increase the growth rate of output? How is this prediction different from the one obtained in the Solow model? Explain what is the crucial difference between the two models. d. Suppose that technology improves and it is now possible to produce more goods with the same amount of capital. What would happen to economic growth in this economy? Explain. e. Assume now that population increases at an exogenous rate n, i.e. n = L W-40. Find an expression for that depends on the growth rate of output per capita), n, and 8.

Answer 1

Proper explanation has been given in the photos provided.