Question

Suppose an economy follows the Solow growth model, with constant investment, depreciation, and population growth rates. Please explain your answers.

(a) Suppose that the government withdraws an investment tax credit leading to a permanent drop in the investment rate. Discuss the effect on the level and growth of per capita income (PCI) in the short run. What happens to the level and growth of PCI in the long-run?

(b) Suppose that the economy is below its steady state level per capita income. Now suppose there is a one-time influx of immigrants that increases the population. What happens to the levels of per capita income and capital per worker in the short run? Will the economy start growing faster or slower after the arrival of the immigrants?

(c) Suppose that the new immigrants bring with them technologically innovative ideas, which lead to an increase in TFP growth (i.e., growth in technology, which is sometimes referred to as total factor productivity or TFP). What is the effect on PCI levels and growth in the short run? in the long run?

(d) Malthusian thinkers argue that, without further reductions in fertility, population growth will eventually lead to sustained lower economic growth and underdevelopment. What would proponents of endogenous growth theory think of this claim?

Answer 1