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Assume that there is no technological progress. Explain carefully, using the neoclassical growth model (the Solow-Swan model), the short-term and long-term effects on GDP per worker, capital per worker, and the rate of growth of GDP of

(i) a decrease in the rate of investment and

(ii) a decrease in the rate of population growth.

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Yusra Anees
Yusra AneesLv10
28 Sep 2019
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Related questions

Many policymakers are concerned that Americans do not save enough. Using the Solow growth model, with no technological change and no population growth, Explain why a higher savings rate will not necessarily generate more consumption per worker?

1. What does the term s*Y represent in the capital-accumulation equation of Solow growth model?

a) The labor-income share of GDP.

b) Net investment.

c) Gross investment.

d) The net change in the capital stock from one year to the other.

2. In the Solow growth model, suppose that the savings rate is 25%, the depreciation rate is 10%, the current capital stock is 10 trillion $ and current output of a country is 4 trillion $. What will the capital stock of this country be in the following period?

a) 10 trillion $.

b) 11 trillion $.

c) We cannot tell since we are not given information about technological progress.

d) We cannot tell since population growth is not known.

3. Consider a country which starts with a capital stock below its steady-state level in the Solow model (without technological change). Why is growth slowing down over time for this country?

a) Population growth is becoming stronger over time since the population is growing, which makes it harder to accumulate high levels of capital per capita.

b) A country cannot maintain the same savings rate forever, so investment must decrease at some point.

c) The more capital there is, the more of it depreciates. As the country becomes richer, it becomes ever harder to replace depreciated capital.

d) There are diminishing returns to the factor capital. Thus investment, capital and GDP per capita grow by ever smaller amounts as the country becomes richer.

4. Suppose Pakistan has a higher savings rate than Iran. Both start out with the same capital per worker. All other parameters are the same for both countries (population growth and depreciation rate). The Solow growth model (without technological change) predicts that...

a)

Two countries, Highland and Lowland, are described by the Solow growth model. Both
countries are identical, except that the rate of labor-augmenting technological progress is
higher in Highland than in Lowland.
a. In which country is the steady-state growth rate of output per effective worker higher?
b. In which country is the steady-state growth rate of total output higher?
c. Does the Solow growth model predict that the two economies will converge to the same steady
state?

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