Question

1. Consider the simple version of the Solow Growth Model discussed in class summarized by these four equations: Consumers save a fraction s of output: 1 = sy Capital grows as follows: K' = 1 + (1 - 8)K Firms use capital to make output: Y = AK 0.3 There is no government or trade: Y = C+/ where Y is GDP, / is investment, C is consumption, s is the savings rate, K is the capital stock this year, K' is the capital stock next year. A is productivity and 8 is the rate of depreciation. a. Use these four equations to give an equation for that only depends on K, A, s and b. Draw a graph that illustrates the relationship between K, the capital stock this year, and K', the capital stock next year: c. Label the steady state level of capital K. d. Suppose the savings rate s goes up. Label the new steady state capital KNEW e. Now suppose that productivity A increases. Illustrate the shift in the curve above, and label the new steady state capital New 2. How does an increase in the saving rate affect economic growth? 3. What explains the long-run growth of per capita GDP? 4. Why do countries like the United States, Germany, and Japan all seem to be converging to the same level of per capita GDP? 5. Why don't all countries converge to the same level of per capita GDP as the United States, Germany, and Japan?

Answer 1

Q3. DETERMINANTS OF LONG RUN GROWTH: Long run growth is defined as the sustained rise in the quanitiy of goods and serviced that an economy produces.

OBJECTIVES: Predict how population growth will ajject the level of capital per worker.

KEY POINTS:a. Economic growth is the increase in the market value of the goods and services that an economy produces over time. it is measured as the precentage rate change in the real gross domestic product[ GDP]. b. Determinants of long run growth include growth of productivity, demodographic changes, and labor force particpation. c.When the economic growth matches the growth of money supply, an economy will continue to grow and thrive. d. Inflationoccurs in an economy when the prices of goods and services continue to rise while the purchasing power derceases. e. When the GDP growth is only caused by inceases in population, the growth is excessive.

INFLATION; An increases in the general level of prices or in the cost of living.

Measuring the GDP: Economic growth is the percntage rate increase in the GDP.Long run growth is directly impacted by the GDP.