Answer to Question #222338 in Macroeconomics for Collins

Question

Answer true or false and explain your answer

(1) In the Solow growth model, given the values of A=120, s=0.11, n=0.03, g=0.07, and δ=0.08, the economy has an equilibrium growth rate of real GDP per effective labour, (Y/AL), equal to 8 percent.

(2) In the graph of the Solow growth model, at any point to the left of the steady-state intersection we have national saving per effective labour greater than steady-state investment per person, causing (K/AL) to increase.

(3) In the Solow growth model, an increase in the marginal propensity to consume shifts the steady-state investment line downward with the implied change in the capital stock resulting in a higher standard of living in the long run.

Answer 1

1.False

The growth rate of real GDP per effective worker should be less than 8% because the population growth rate and savings rate are so minimal.

2.True

Above the 45 degrees line, that is to the left of the steady state intersection, we have more income implying that each effective labourer will have a larger amount to save though investment per person will not be altered at steady state. This causes $(\frac {K}{AL})$ to increase.

3.True

When marginal propensity to consume increases, steady state investment line shifts downwards because there will be less savings for investments. Money that could be saved is maximized in consumption hence higher living standards are realized in the long run.