Question 6

In the Solow model, suppose the production function is

Yt=AKtaLt1-a

where labour grows at a constant rate gL. That is

Lt+1=(1+gL)Lt

and capital evolves according to

Kt+1=1-dKt+sYt

(a) What is the growth rate of aggregate output, aggregate capital, output per worker, and consumption per worker in the long-run (i.e. at the steady state)?

[2 marks]

(b) Suppose that government policies increase the saving rate. Explain in words how these policies will affect the level and growth rate of output per worker in the long-run.

[2 marks]

(c) Now suppose that Mathematics is removed from the school curriculum because it is deemed to be too difficult. Which parameter of the Solow model is this likely to affect? Explain in words and via the Solow diagram how the economy transitions from the old to the new steady state. Label and explain the impact on consumption per worker.

[6 marks]

[Total for Question 6 = 10 marks]

Question 6

In the Solow model, suppose the production function is

Yt=AKtaLt1-a

where labour grows at a constant rate gL. That is

Lt+1=(1+gL)Lt

and capital evolves according to

Kt+1=1-dKt+sYt

(a) What is the growth rate of aggregate output, aggregate capital, output per worker, and consumption per worker in the long-run (i.e. at the steady state)?

[2 marks]

(b) Suppose that government policies increase the saving rate. Explain in words how these policies will affect the level and growth rate of output per worker in the long-run.

[2 marks]

(c) Now suppose that Mathematics is removed from the school curriculum because it is deemed to be too difficult. Which parameter of the Solow model is this likely to affect? Explain in words and via the Solow diagram how the economy transitions from the old to the new steady state. Label and explain the impact on consumption per worker.

[6 marks]

[Total for Question 6 = 10 marks]