Question

1/ Which of the following changes would cause a country to have permanently higher output per worker?

a. A higher savings rate.

b. A higher population growth rate.

c. A war that lowers its population by one-half.

d. None of the above.

2/ The Harrod-Domar model predicts that investment will lead to permanently higher growth of income per capita. What property does it fail to account for?

a. Capital depreciates.

b. Production of new capital requires saving and investment today.

c. The population grows over time.

d. There is diminishing returns to capital.

3/ China's PPP GDP p.c. is currently growing at around 7% per year. Analysts note that if they continue to grow at this rate, they will overtake the United States around 2042. What is the problem with this projection based on the Solow Model?

a. The growth is probably fueled by an increase in saving, which means it will not last.

b. It does not specify what day and month China will overtake the United States.

c. Chinese growth will probably accelerate soon, leading them to catch up sooner.

d. China's population growth is too low to sustain this high growth rate.

Answer 1

Answer: 1: a. A higher saving rate

according to solow growth model higher saving rates increases the investment which leads to higher capital stock and capital per worker it shifts the economy to higher steady state level and the output and growth rate increases.

answer: 2: d. There is diminishing returns to capital.

the Harrod - Domar model is based on the constant returns to capital. it assumes that marginal productivity of capital is constant

answer: 3:  a. The growth is probably fueled by an increase in saving, which means it will not last.

for long run higher growth and output there is need for higher saving rates if China could not put up to it with the growing economy than it will not be achieve the GDP of U.S

Answer 2

1. A higher savings rate would cause a country to have permanently higher output per worker, as it would increase the amount of investment available for capital accumulation and productivity growth.

2. The Harrod-Domar model fails to account for diminishing returns to capital, which means that as the amount of capital in an economy increases, the additional output generated by each additional unit of capital will decrease. This means that investment alone cannot lead to permanently higher growth of income per capita.

3. The problem with this projection based on the Solow Model is that it assumes that China's growth rate will remain constant, which is unlikely given the diminishing returns to capital. As the amount of capital in an economy increases, the marginal productivity of capital will decrease, which means that China's growth rate will likely slow down over time. Additionally, China's population growth is also expected to slow down, which will further decrease the rate of growth in output per worker.