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ECON-UA- 12

INTERMEDIATE MACRO

DEPARTMENT OF ECONOMICS

SPRING 2023

Problem Set 4

More on Economic Growth

1.   Suppose an economy is described by the Solow model. The rate of population growth is 5 percent, the rate of technological progress is 3 percent, the depreciation rate is 5  percent, and the saving rate is 10 percent. Calculate the steady-state growth rate of output and the steady-state growth rate of output per worker.

2.   In the Solow model of labor-augmenting technological change, explain in words why in the steady state the real wage grows at the rate of technological progress but the real rental price is constant.

3.   [Postponed]In the Neo-Schumpeterian model of creative destruction of Aghion and  Howitt (1992), explain why the size of the innovation has a positive relationship with the rate of innovation but the productivity of R&D labs in finding the next new thing has an ambiguous effect on the rate of growth of innovation.

4.   The economy of the land of Nod is described by the following data:

Labor’s share of income is two-thirds.

Output grows by 6 percent per year.

The capital stock grows by 9 percent per year.

The labor force grows by 3 percent per year.

Given these data, calculate the growth of total factor productivity.

5.   Suppose an economy is described by the following data:

the capital stock is 4 times GDP,

total depreciation is 8 percent of GDP (hint: total depreciation = 6K = 0.08*Y), total capital income is 20 percent of GDP (hint: total capital income is the total earnings of all the capital in the economy and is equal to the product of the real

rental price and the capital stock or (R/P)*K where (R/P) = MPK). What is the net marginal product of capital?

If population growth is 1% and the growth rate of efficiency workers is 2% is the economy at a steady state? Is the economy at the Golden Rule?

Chapter 10 Problem #1

Chapter 10 Problem #4 (hint: you are given gE but asked to calculate gA = gTFP)