Answer to Question #258393 in Macroeconomics for shon

Question

An economy is in a steady state with no productivity change. Because of an increase in acid rain, the rate of capital depreciation rises permanently. a. According to the Solow model, what are the effects on steady-state capital per worker, output per worker, consumption per worker, and the long-run growth rate of the total capital stock? b. In an endogenous growth model, what are the effects on the growth rates of output, capital, and consumption of an increase in the depreciation rate of capital

Answer 1

Under the Solow growth model, the rise in capital depreciation shifts up the (n+d)k line from $(n+d_1)k$ to $(n+d_2)k$ . The equilibrium steady state capital labor ratio declines. With a lower capital- labor ratio, output per worker is lower and so consumption per worker is lower( using the assumption that Capital labor ratio is not so high that an increase in k will reduce consumption per worker. There is no effect on the long run growth rate of the total capital stock.