Exam 5: The Solow Growth Model

Refer to the following figure when answering Figure 5.1: Solow Diagram -In Figure 5.1, if the economy begins with the initial capital stock at K₁, the capital stock will ________ and the economy will ________.

In the Solow model, if investment is ________ depreciation, the capital stock ________.

Refer to the following figure when answering Figure 5.2 -In Figure 5.2, steady state investment is represented by:

Assume a production function is given by $Y = \bar { A } K _ { t } ^ { 1 / 3 } \bar { L } ^ { 2 / 3 }$ . If $\bar { A } = 2$ And $\bar { L } = 1$ , the depreciation rate is $\bar { d } = 0.05$ , and the saving rate is $\bar { s } = 0.1$ , the steady-state level of capital is about:

The Solow model of economic growth:

In 1960, the Phillipines had a per capita income ________ South Korea. In 2010, ________.

Refer to the following figure when answering Figure 5.5: Solow Diagram -Consider Figure 5.5, which represents two countries, 1 and 2. Country ________ has a higher depreciation rate and, therefore, has a ________ steady state than the other country.

Refer to the following figure when answering Figure 5.4: Solow Diagram -Consider Figure 5.4, which represents two countries, 1 and 2. Country ________ has a higher saving rate and will have a ________ steady state than the other country.

Using the Solow model, if, in time t = 0, the initial capital stock is K₀ = 100, investment is I₀ = 25, and $\bar { d } = 0$ .1 is the depreciation rate, capital accumulation is:

A central lesson of the Solow model is a bit of a surprise:

Which of the following is/are left out of the Solow model?

In the Solow model, the parameter $\bar { d }$ denotes ________ and is ________.

Refer to the following figure when answering Figure 5.4: Solow Diagram -Consider the Solow model exhibited in Figure 5.4. Which of the following is/are true? i. For any single country, the movement from point a to b is due to an increase in the saving rate, s₁ > s₂. ii. For any single country, the movement from point c to b is due to an increase in capital stock for the saving rate, s₂. iii. If s₁ and s₂ stands for the saving rates in Countries 1 and 2, respectively, Country 2 has a lower saving rate.

In the steady state, capital accumulation is positive.

Given a production function $Y _ { t } = \bar { A } K _ { t } ^ { 1 / 3 } \bar { L } ^ { 2 / 3 }$ , if $\bar { A } = 2 , \bar { L } = 4 , \bar { s } = 0.2$ , and $\bar { d } = 0.05$ : (a) Calculate the steady-state level of capital and output. (b) Does the above production function exhibit constant returns to scale, or does it exhibit diminishing marginal returns? Explain, and define the difference between these two concepts.

In the standard production model, the productivity parameter enters the equation with an exponent of one, while in the Solow model it is greater than one because:

What are the key assumptions of the Solow growth model?

The key insight in the Solow model is that:

The Solow model assumes:

Assume a production function is given by $Y = \bar { A } K _ { t } ^ { 1 / 3 } \bar { L } ^ { 2 / 3 }$ . If $\bar { A } = 2$ And $\bar { L } = 1$ , and the steady-state capital stock is 8.0, the steady-state level of output is about: