Question

MORE EXERCISES 1. Transition dynamics: What is the principle of transition dynamics in the com- bined Solow-Romer model? 2. Long-run growth: Growth in the combined Solow-Romer model is faster than growth in the Romer model. In what sense is this true? Why is it true? 3. Balanced growth: Suppose we observe the following growth rates in various economies. Discuss whether or not each economy is on its balanced growth path. (a) A European economy: gy/l = 0.03,gkil = 0.03. (b) A Latin American economy: gyil = 0.02, 8K/L = 0.01. (c) An Asian economy: gyıl = 0.06, Ekil = 0.15. 4. Transition dynamics in the combined Solow-Romer model: Consider the com- bined model studied in this appendix. Suppose the economy begins on a bal- anced growth path in the year 2000. Then in 2030, the depreciation rate d rises permanently to the higher level d'. (a) Graph the behavior of output per person over time, using a ratio scale. (b) Explain what happens to the growth rate of output per person over time and why. 5. The combined Romer-Solow model (t): Make one change to the basic combined model that we studied in this appendix: let the production function for output

Answer 1

1. Transition Dynamics

The rate of growth in the economy in the Solow-Romer model is balanced,however the output, Capital Stock and total factor productivity grow at constant rate.The growth rate can alter temporarily by a change in the underlying parameters of the model,but the balance rate of growth will transition back in the economy due to diminishing returns to the capital. The further it is below it's balanced growth / capita output, the more faster it will bounce back.