178.

200 Intermediate Macroeconomics

Tutorial (12)
Economic Growth

1
Short Answer Questions from Textbook

1. Question 4 of Questions for Review on

P205.
In the Solow model, how does the rate of
population growth affect the steady-state
level of income? How does it affect the
steady-state rate of growth?

2
Short Answer Questions from Textbook

Hint:
The higher the population growth rate is, the
lower the steady-state level of capital per
worker is, and therefore there is a lower
level of steady-state income.

3
Short Answer Questions from Textbook

(continued)
(δ+n2)k & sf(k)
The higher population (δ+n2)k
growth n2 means that
(δ+n1)k
the line representing
population growth and sf(k)
depreciation is higher,
so the steady-state
level of capital per
worker is lower.
k2* k1* k
4
Short Answer Questions from Textbook

(continued)
The steady-state growth rate of total income
is n+g: the higher the population growth
rate n is , the higher the growth rate of total
income is. Income per worker, however,
grows at rate g in steady-state and, thus, is
not affected by population growth.

5
Short Answer Questions from Textbook

2. Question 6 of Questions for Review on

P227.
How does endogenous growth theory
explain persistent growth without the
assumption of exogenous technological
progress? How does this differ from the
Solow model?

6
Short Answer Questions from Textbook
Hint:
Endogenous growth theories attempt to explain the
rate of technological progress by explaining the
decisions that determine the creation of knowledge
through research and development. By contrast,
the Solow model simply took this rate as
exogenous. In the Solow model, the saving rate
affects growth temporarily, but diminishing
returns to capital eventually force the economy to
approach a steady-state in which growth depends
only on exogenous technological progress.
7
Short Answer Questions from Textbook

(continued)
However, many endogenous growth models
in essence assume that there are constant
(rather than diminishing) returns to capital,
interpreted to include knowledge. Hence,
changes in the saving rate can lead to
persistent growth.

8
Numerical Questions

1. Suppose that the production function is

Y = 10( K )1/ 4 ( L) 3 / 4 and 2% of capital wears out every
year. Assume that the rate of growth of
population equals 0. If the saving rate s is 0.128,
calculate the steady state level of capital per
worker, output per worker, consumption per
worker, saving and investment per worker, and
depreciation per worker.

9
Numerical Questions

Answer:
Y = 10( K )1/ 4 ( L) 3 / 4
Y / L = 10( K )1/ 4 ( L) −1/ 4 = 10( K / L)1/ 4
y = 10k 1/ 4
Meanwhile, δ = 0.02, s = 0.128, and
Δk = i – δk = sf(k) – δk = sy - δk.
In the steady state, Δk = 0.
10
Numerical Questions

(continued)
Then
(1 10) 4 ⋅ y 4 s 10 4
s
= ⇒y =
3
⇒ y = 3 64000 = 40
y δ δ
k = 256.
c = (1-s)y = 0.872y = 34.88.
i = δk = y - c = 5.12
δk = 5.12
11
Numerical Questions

2. Suppose the production function is

Y = 10( K )1/ 4 ( EL) 3 / 4 and capital lasts an average of
10 years. Assume that the rate of growth of
population is 4% and the rate of
technological growth is 2%. The MPK can
−3 / 4
be expressed as MPK = 2 . 5( k ) where k is the
level of capital per effective worker.

12
Numerical Questions

• Derive the equation for output per

effective worker y = Y/EL = f(k).
Answer:
Y = 10( K )1/ 4 ( EL) 3 / 4
−1 / 4
Y / EL = 10( K ) ( EL)
1/ 4
= 10( K / EL)
1/ 4

y = 10k 1/ 4

13
Numerical Questions

b. Calculate the Golden Rule level of capital per

effective worker and the output per effective
worker associated with the steady state.
Answer:
δ = 1/10 = 0.1, n = 0.04, g = 0.02, and
MPK = 2.5(k ) −3 / 4. In the meantime,
subject to the Golden Rule, MPK = δ + n + g.
Then k* = 39.0625, y = 10( k *)1/ 4
= 25

14
Numerical Questions
c. Calculate all of the following at the Golden
Rule level: saving rate, saving and
investment per effective worker, and
consumption per effective worker.
Answer:
Δk = sf(k) – (δ+n+g)k = sy – (δ+n+g)k.
In the steady state, Δk = 0. Then
(δ + n + g ) ⋅ k *
s=
y 15
Numerical Questions

(continued)
s = 39.0625 (0.16/25) = 0.25
saving per effective worker = i = 6.25
c = f(k) – (δ+n+g)k = 25 - 6.25 = 18.75.

16
Multiple-Choice Questions
(2005 Exam Question)
(1) In a steady state with no population growth:
b. The amount of capital per worker remains
constant over time.
c. Investment per worker equals depreciation per
worker.
d. Saving per worker equals depreciation per
worker.
e. All of the above.
Answer: d.
Hint: P185.
17
Multiple-Choice Questions
(2005 Exam Question)

(2) With no population growth, the steady state level

of capital per worker will increase whenever:
b. The amount of investment per worker decreases.
c. The depreciation rate increases.
d. The saving rate increases.
e. All of the above.
Answer: c.
Hint: PP189-190.
18
Multiple-Choice Questions
(2005 Exam Question)

(3) If y = k , s = 0.4, and the depreciation rate δ =

1/ 2

20 percent, the steady state level of the capital

stock per worker is:
• 4.
• 8.
• 2.
• 16.
Answer: a. k* s
y = k 1/ 2 = f (k *), = = 0.4 / 0.2 = 2.
Hint: k* δ
k * = 4. 19
Multiple-Choice Questions
(2005 Exam Question)
*
(4) The Golden Rule level of capital k
gold denotes the
steady state with the highest:
b. Level of consumption per worker.
c. Level of output per worker.
d. Growth rate of consumption per worker.
e. Growth rate of output per worker.
Answer: a.
Hint: P193.
20
Multiple-Choice Questions
(2005 Exam Question)

(5) Excluding population growth, at the Golden Rule

*
level of capital k gold :
a. f ( k gold ) = δk gold .
* *

b. MPK = δ.
c. f(k) reaches a maximum.
d. All of the above.
Answer: b.
Hint: P194.
21
Multiple-Choice Questions
(2005 Exam Question)
(6) Suppose that a country in a steady state
implements policies to increase its saving rate.
After the new steady state is reached:
b. Output per worker will grow more rapidly than
before.
c. The level of output per worker will be higher
than before.
d. The amount of capital per worker will be the
same as before.
e. All of the above.
Answer: b. Hint: P190.
22
Multiple-Choice Questions
(2005 Exam Question)

(7) If y = k , δ = 5%, and the Golden Rule level of

1/ 2
*
capital k gold = 100, then the saving rate associated
with the Golden Rule level of capital is:
b. 5%.
c. 10%.
d. 20%.
e. 50%.
Answer: d.
k* s s 100
Hint: = ⇒ = ⇒ s = 0.5 = 50%
k* δ 0.05 10
23
Multiple-Choice Questions
(2005 Exam Question)

(8) In the Solow growth model with population

growth n, the change in capital per worker is
equal to:
• sf(k) + (δ + n)k.
• sf(k) + (δ - n)k.
• sf(k) - (δ + n)k.
• sf(k) - (δ - n)k.
Answer: c.
Hint: P200.
24
Multiple-Choice Questions
(2005 Exam Question)
(9) An increase in the rate of population growth n
will:
b. Increase the steady state level of capital per
worker.
• Decrease the steady state level of capital per
worker.
• Have no effect on the steady state level of
capital per worker.
• Decrease the steady state level of capital per
worker if δ < n and increase the steady state
level if δ > n.
Answer: b Hint: P202. 25
Multiple-Choice Questions
(2005 Exam Question)
(10) The Solow growth model predicts that countries
with higher population growth rates will have:
b. Lower steady state level of output per worker.
c. Lower steady state growth rates of output per
worker.
d. Both a and b.
e. Higher steady state growth rates of output per
worker.
Answer: a.
Hint: P202.
26
Multiple-Choice Questions
(2005 Exam Question)
(11) In the Solow growth model with population
growth n and labor augmenting technological
progress g, the change in capital per effective
worker is equal to:
• sf(k) + (δ + n + g)k.
• sf(k) + (δ – n - g)k.
• sf(k) - (δ + n + g)k.
• sf(k) - (δ – n - g)k.
Answer: c.
Hint: P209.
27
Multiple-Choice Questions
(2005 Exam Question)
(12) In the Solow growth model with population
growth and technological progress, the steady
state growth rate in output per effective worker is
equal to:
• zero.
• The rate of technological progress g.
• The growth rate of population n plus the rate of
technological progress g.
• The saving rate s.
Answer: a. Hint: P210.
28
Multiple-Choice Questions
(2005 Exam Question)
(13) In the Solow growth model with population
growth and technological progress, the steady
state growth rate in output per worker is equal
to:
• zero.
• The rate of technological progress g.
• The growth rate of population n plus the rate of
technological progress g.
• The saving rate s.
Answer: b. Hint: P210.
29
Multiple-Choice Questions
(2005 Exam Question)
(14) If the capital stock in a country is initially below
the Golden Rule level of capital, the country can
move toward the Golden Rule steady state by:
b. Increasing the rate of saving.
c. Reducing government expenditures on
noninvestment items.
d. Providing tax incentives that reward new
investment.
e. All of the above.
Answer: d. Hint: P212.
30
Multiple-Choice Questions
(2005 Exam Question)

(15) Technological progress is encouraged by:

b. The patent system.
c. Tax incentives for research and development.
d. Government subsidies for research.
e. All of the above.
Answer: d.
Hint: PP215-216.

31
Multiple-Choice Questions
(2005 Exam Question)
(16) When the steady state has been reached:
b. Real wages grow at the rate of technological
progress.
c. The real rental cost of capital grows at the rate of
technological progress.
d. The number of effective workers grows at the
rate of technological progress.
e. All of the above.
Answer: a.
Hint: P220.
32
Multiple-Choice Questions
(2005 Exam Question)

(17) In the Solow growth model, the rate of

technological progress is:
b. exogenous.
c. endogenous.
d. 3%.
e. 0%.
Answer: a.
Hint: P222.
33
Multiple-Choice Questions
(2005 Exam Question)
(18) Acceptance of endogenous growth theory
implies:
b. Additional saving and investment can lead to
persistent growth.
c. Capital may not be subject to diminishing
returns if knowledge is viewed as a type of
capital.
d. The rate of technical change is endogenous.
e. All of the above.
Answer: d Hint: PP223-224.
34