Chapter 7: Economic growth

Part A

1. Textbook review question 1.

2. Textbook review question 2.

3. According to Malthus, why do improvements in the technology for producing food not
lead to higher consumption per capita in the long run? Do they in the short run?

4. Textbook review question 5.

5. What determines how fast the population grows in the Solow model? How does it
differ from Malthus?

6. How is the labor supply determined in the Solow model? What affects the labor supply
according to our general analysis from chapter 4?

7. How is consumption determined in the Solow model? How did consumers determine
their consumption in our analysis from chapter 4?

8. What does it mean for the function F to have constant returns to scale?

9. Assuming constant returns to scale, show that if aggregate production is a function of

capital and labor, output per worker will be a function of only capital per worker.

10. Plot output per worker y as a function of capital per worker k. What is the slope of
the function? Why is the slope positive? Why is the slope decreasing in k?

11. Why can capital accumulation alone not lead to indefinite growth, according to the
Solow growth model?

12. Why might it not be a good idea to implement the golden-rule savings rate? What are
the benefits?

K K N
13. Show that if k = N
, then k = N
N
k

14. Exploiting the following relations

(a) K = I dK, so that the increase in the capital stock equals investment minus
the capital that depreciated, where 0 < d < 1 is the constant depreciation rate
(b) y = zf (k), as shown in problem 9
(c) Y = C + I, since G = N X = 0
(d) S = Y C, by definition
(e) S = sY , since consumers are assumed to save a constant fraction 0 < s < 1 of
their income
K
(f) k = N
nk, where n > 1 is the constant population growth rate

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 show that k = szf (k) (n + d) k.

15. Solow growth model dynamics.

(a) Plot szf (k) as a function of k and explain why it looks the way you have drawn
it.
(b) In your figure from part a, plot (n + d) k as a function of k and explain why it
looks the way you have drawn it. Assume that n + d > 0.
(c) Where can we observe k in the figure?
(d) Use your figure to show what will happen to k over time.
(e) How will k, y and c behave in the steady state? What about K, Y , C and I?

16. Textbook problem 5.

17. Saving and the golden rule in the Solow model.

(a) Show graphically the effects on steady-state capital per worker and output per
worker from a drop in the savings rate s.
(b) Show graphically the savings rate that maximizes steady-state per-capita con-
sumption.
(c) Show graphically that lowering the savings rate could actually lead to lower
steady-state per-capita consumption. Show that it is also possible for an in-
crease in the savings rate to lead to higher steady-state per-capita consumption
in the long-run.

18. According to Malthus, why is it likely that historical episodes of temporary high mortal-
ity, such as the black plague, were followed by periods of temporarily higher standards
of living?

19. Textbook problem 3.

If you are interested, the mathematical appendix (pp. 672-674) shows how the Solow
model can be analyzed using calculus. Calculus is not required for this class, so this
material will not be covered in class or on the tests.

Part B

1. Textbook review question 6.

2. Textbook review question 8.

3. Textbook review question 9.

4. Textbook review question 10.

5. Textbook review question 11.

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 6. Textbook review question 12.

7. Textbook review question 13.

8. Textbook review question 14.

9. What is the purpose of growth accounting?

10. Textbook problem 4.

11. Suppose that the population growth rate decreases. In the Solow growth model, deter-
mine the effect of this on the quantity of capital per worker and on output per worker
in the steady state. Explain the economic intuition behind your results.

12. Suppose total factor productivity increases. In the Solow growth model, determine the
effect of this on the quantity of capital per worker and on output per worker in the
steady state. Explain the economic intuition behind your results.

13. Suppose total factor productivity decreases. In the Solow growth model, determine
the effect of this on the quantity of capital per worker and on output per worker in the
steady state. Explain the economic intuition behind your results.

14. It is sometimes argued that we need to save and invest more in order for the economy to
grow. Use the Solow model to discuss whether saving more leads to economic growth.
Is such growth permanent or temporary? Are there any drawbacks to such a policy?

15. Textbook problem 6.

16. Textbook problem 8.

17. Textbook problem 9.

18. Textbook problem 11.

19. Textbook problem 12.

In a way, the models of this chapter suffer from the same problem that the textbook
uses to criticize old maroeconomics, which is that many of the relations or equations
are assumed, instead of derived. For example, in the Solow model, we assume that an
increase in income makes consumers save more, without showing that this is actually
how utility-maximizing consumers would respond to increased income (which we will
study in chapter 8). The mathematical appendix (pp. 674-677) uses calculus to show
that the steady-state analysis for the Solow model would remain unchanged if the savings
rate were chosen in a utility-maximizing way. Calculus is not required for this class,
so this material will not be covered in class or on the tests.