Chapter 6 Mishkin

Macreconomics: Policy and Practice (Mishkin)
Chapter 6 The Sources of Growth and the Solow Model

6.1 Sources of Economic Growth: Growth Accounting
1) The economic growth of the United States over the last century .
A) is !est understood as the result of high levels of saving and investment
") is #uite unli$e the e%&erience of most other economies.
') was driven !y rising im&ort &urchases.
() was the result of reducing government intervention in the economy.
Answer: "
To&ic: 6.1 Sources of Economic Growth
AA'S": )eflective Thin$ing
*) +ational out&ut is a function of .
A) ca&ital and saving
") technology, em&loyment and demand
') la!or and de&reciation
() la!or, technology and ca&ital
Answer: (
-) The growth accounting e#uation suggests that the growth rate of out&ut is e#ual to the growth
rate of .
A) total factor &roductivity &lus the contri!utions of !oth ca&ital and la!or
") total factor &roductivity minus the rate of de&reciation
') ca&ital and la!or
() the overall &o&ulation
Answer: A
AA'S": Analytical S$ills
.) 'a&ital and la!or are distinct from &roductivity in that .
A) &roductivity is inde&endent of technology changes
") &roductivity can only increase over time
') &roductivity is su!/ect to diminishing returns
() ca&ital and la!or are su!/ect to diminishing marginal returns
Answer: (
1
'o&yright 0 *11* 2earson Education, 3nc.
4) 5hich of the following is the most difficult to measure6 'hanges in .
A) the si7e of the la!or force
") &o&ulation
') the #uantity of la!or
() &roductivity
Answer: (
6) 2roductivity growth can !e measured .
A) !y dividing out&ut !y 8
t
1.-
9
t
1.:
") !y adding the contri!utions from ca&ital growth and la!or growth
') !y su!tracting the contri!utions from ca&ital growth and la!or growth from the growth of
out&ut
() !y dividing the growth of out&ut !y the contri!utions from ca&ital growth and la!or growth
Answer: '
:) 2roductivity is .
A) determined !y central !an$ &olicy
") the com!ined effect of monetary and fiscal &olicy
') the residual com&onent of the &roduction function
() driven !y changes in the rate of growth of out&ut
Answer: '
;) 3f &roductivity growth e#uals -.1 &ercent, the contri!ution from ca&ital growth 1.* &ercent and
the contri!ution from la!or growth *.1 &ercent, then out&ut growth must e#ual .
A) *.* &ercent.
") ..* &ercent.
') 6.* &ercent.
() :.* &ercent.
Answer: '
<) 3f the contri!ution from ca&ital and la!or growth in a given economy e#uals ..1 &ercent and
out&ut growth e#uals 6.. &ercent over that same &eriod of time, then &roductivity growth must
e#ual .
A) *4.6 &ercent.
") 11.. &ercent.
') *.. &ercent.
() 1.6 &ercent.
Answer: '
*
11) The slowdown in U.S. economic growth in the &eriod 1<:.=<4 was &rimarily caused !y
.
A) falling la!or growth.
") falling ca&ital growth.
') falling &roductivity growth.
() none of the a!ove
Answer: '
11) The highest rate of U.S. growth was recorded in which of the following &eriods6
A) 1<.;=:-.
") 1<6:=;-.
') 1<:.=<4.
() 1<<6=*11;.
Answer: A
1*) Economic growth .
A) is driven !y different elements in different economies.
") is driven &rimarily !y digital technology.
') is driven &rimarily !y la!or growth.
() cannot !e e%&lained using economic models.
Answer: A
-
Figure 6.1
1-) According to >igure 6.1, the average annual rate of growth of the U.S. economy in the &eriod
1<.;=:- e#ualled .
A) 1.; &ercent.
") ..1 &ercent.
') -< &ercent.
() 6<: &ercent.
Answer: "
1.) According to >igure 6.1, the average annual rate of growth of the U.S. economy in the &eriod
1<<6=*11; e#ualled .
A) 1.- &ercent.
") -.1 &ercent.
') -1 &ercent.
() -11 &ercent.
Answer: "
.
14) According to >igure 6.1, in &ostwar U.S history .
A) &roductivity growth was always e%ceeded !y la!or growth.
") la!or growth has always e%ceeded ca&ital growth.
') &roductivity growth has always e%ceeded ca&ital growth.
() out&ut growth has always e%ceeded &roductivity growth.
Answer: (
16) According to >igure 6.1, the &eriod from 1<:. to 1<<4 is &articularly remar$a!le for the slow
growth of .
A) out&ut &er wor$er
") la!or in&ut
') out&ut
() ca&ital in&ut
Answer: A
1:) According to >igure 6.1, the &eriod from 1<<6 to *11; is &articularly remar$a!le for the
ra&id growth of .
A) &roductivity
") la!or in&ut
') out&ut
() ca&ital in&ut
Answer: A
1;) According to >igure 6.1, fluctuations in the rate of out&ut growth are due mostly to changes
in the growth of .
A) &roductivity
") la!or in&ut
') out&ut
() ca&ital in&ut
Answer: A
1<) 3n >igure 6.1, the &ost=5orld 5ar 33 ?!a!y !oom? is reflected in the growth of .
A) la!or in&ut from 1<:. = 1<<4
") la!or in&ut from 1<.; = 1<:-
') out&ut from 1<.; = 1<:-
() ca&ital in&ut from 1<<6 = *11;
Answer: A
4
*1) Across national economies which of the following is the most im&ortant source of variation
in growth rates6
A) la!or growth.
") ca&ital growth.
') &roductivity growth.
() government regulation.
Answer: '
*1) The la!el @Asian Tigers@ descri!es the following economies .
A) 'hina, South 8orea, Singa&ore and Taiwan.
") Aong 8ong, Taiwan, South 8orea and Singa&ore.
') Singa&ore, Taiwan, Aong 8ong, and 'hina.
() South 8orea, Singa&ore, 'hina and Aong 8ong.
Answer: "
**) The growth rate of which of the following is not a com&onent of the growth accounting
e#uation6
A) the ca&ital stoc$.
") la!or.
') de&reciation.
() availa!le technology.
Answer: '
*-) 3f the contri!ution from ca&ital growth e#uals - &ercent and the contri!ution from
&roductivity growth e#uals 1.6 &ercent, G(2 will grow !y .
A) 1.6 &ercent.
") ..6 &ercent.
') ..; &ercent.
() an un$nown value.
Answer: (
6
*.) 3f the contri!ution from ca&ital growth e#uals * &ercent and the contri!ution from la!or
growth e#uals . &ercent, then G(2 .
A) will grow !y 6 &ercent.
") will grow !y ; &ercent.
') will grow !y * &ercent.
() will change !y an un$nown &ercentage.
Answer: (
*4) Given the &roduction function B C A 8
1.-
9
1.:
if out&ut grows !y five &ercent, the ca&ital
in&ut grows !y five &ercent, and the la!or in&ut grows !y two &ercent, calculate the Solow
residual. 'alculate the growth rates of out&ut &er wor$er and ca&ital &er wor$er.
Answer: The Solow residual gA C 1.14 = 1.- 1.14 = 1.: 1.1* C 1.1*1. The growth rate of
out&ut &er wor$er is 1.14 = 1.1* C 1.1-, which is also the growth rate of ca&ital &er wor$er.
*6) Dut&ut growth in the United States in the &eriod 1<<6 to *11; averaged three &ercent &er
year. Though this was an im&rovement on the *.<E average annual growth of out&ut over the
&receding *1 years, an increase of one=tenth of a &ercentage &oint seems hardly to /ustify the
&o&ularity of the la!el ?new economy.? 'omment.
Answer: Dut&ut growth is the result of growth of the three com&onents, &roductivity, ca&ital,
and la!or. Though out&ut growth after 1<<4 was !arely higher than it had !een &reviously, the
com&osition of growth had changed su!stantially. The growth rates of !oth ca&ital and la!or fell,
while the growth rate of &roductivity nearly dou!led, from 1.:E to 1.-E.
:
6.* The Solow Growth Fodel
1) The &er=wor$er &roduction function is .
A) u&ward=slo&ing.
") downward=slo&ing
') vertical.
() hori7ontal.
Answer: A
To&ic: 6.* The Solow Growth Fodel
*) The Solow model is .
A) the !asic model of how technology changes over time
") the foundation for the classical economic thought of Adam Smith.
') one of the dominant e%&lanations of the !usiness cycle.
() !ased on the notion of diminishing marginal &roduct of ca&ital and la!or
Answer: (
-) 3n the Solow model, which of the following is an exogenous varia!le6
A) &roductivity
") the ca&ital=la!or ratio
') consum&tion &er wor$er
() investment &er wor$er
Answer: A
.) 3n the Solow model, which of the following is an endogenous varia!le6
A) out&ut &er wor$er
") government s&ending
') the saving rate
() the de&reciation rate
Answer: A
4) The &ositive slo&e of the &er=wor$er &roduction function illustrates the relationshi& !etween
&er=wor$er out&ut and .
A) diminishing marginal returns.
") the ca&ital=la!or ratio.
') the rate of inflation.
() the rate of unem&loyment.
Answer: "
;
6) The &er=wor$er &roduction function flattens out due to .
A) the negative relationshi& !etween &rice and #uantity demanded.
") the &ositive relationshi& !etween &rice and #uantity demanded.
') the diminishing marginal &roduct of ca&ital
() an increase in the general level of &rices.
Answer: '
:) 5ith a closed economy and no government s&ending, the total demand for out&ut is e#ual to
.
A) consum&tion &er=wor$er &lus investment &er=wor$er.
") consum&tion &er=wor$er minus investment &er=wor$er.
') consum&tion &er=wor$er times investment &er=wor$er.
() consum&tion &er wor$er divided !y investment &er=wor$er.
Answer: A
;) 3n a closed economy .
A) investment e#uals consum&tion.
") investment e#uals savings.
') saving e#uals consum&tion.
() e%&orts are greater than im&orts.
Answer: "
<) 3f de&reciation is e#ual to investment .
A) ca&ital &er=wor$er rises over time.
") ca&ital &er=wor$er is sta!le.
') ca&tial &er=wor$er falls over time.
() ca&ital &er wor$er e#uals saving
Answer: "
11) 3f ca&ital &er=wor$er is rising, then .
A) de&reciation is e#ual to investment.
") de&reciation is greater than investment.
') de&reciation is less than investment.
() de&reciation is less than consum&tion.
Answer: '
<
11) 3f de&reciation is less than investment .
A) ca&ital &er=wor$er is falling.
") ca&ital &er=wor$er is rising.
') ca&ital &er=wor$er is constant.
() ca&ital &er wor$er is greater than saving
Answer: "
1*) 'hanges in the ca&ital stoc$ are caused !y changes in .
A) the #uantity of la!or.
") de&reciaton and investment.
') de&reciation and entre&reneurshi&.
() de&reciation and the #uantity of la!or.
Answer: "
1-) 3f investment &er=wor$er e#uals some value G, and de&reciation &er=wor$er e#uals some
value H, then the change in the ca&ital stoc$ &er=wor$er is e#ual to .
A) GIH.
") G=H.
') G times H.
() G divided !y H.
Answer: "
1.) 3n the !athtu! analogy, which of the following is a stoc$ varia!le6
A) the amount of investment.
") the rate of de&reciation.
') the amount of ca&ital=&er wor$er.
() the 'o!!=(ouglass value.
Answer: '
14) 3f an economy invests more than it loses through de&reciation .
A) the saving rate will fall.
") the saving rate will rise
') the #uantity of la!or will fall.
() the ca&ital stoc$ will e%&and.
Answer: (
11
16) The loss of ca&ital due to the wearing out of machines is $nown as .
A) saving.
") investment.
') consum&tion.
() de&reciation.
Answer: (
1:) 3f an economy initially starts away from the steady state .
A) out&ut will gradually fall over time.
") the economy will converge to the steady state in the long=run.
') consum&tion s&ending must !e greater than investment s&ending.
() consum&tion s&ending must rise.
Answer: "
1;) The Solow model suggests that economies with the same aggregate &roduction function,
ratio of wor$ers to the total &o&ulation and saving rates will .
A) trade with one another.
") start with different initial levels of &er ca&ita income.
') &ossess the same rate of de&reciation.
() e%&erience convergence.
Answer: (
1<) Strong evidence of convergence e%ists for .
A) wealthy nations that !elong to the Drgani7ation for Economic 'oo&eration and (evelo&ment.
") !oth rich and &oor nations.
') su!=Saharan African economies and the economies of +orth America.
() Euro&ean and 'ari!!ean economies.
Answer: A
*1) 5hich of the following had the highest rate of growth during the &eriod 1<.;=:*6
A) 5est Germany.
") Jietnam
') Ka&an.
() The United States of America.
Answer: '
11
*1) 5ithin rich economies, there is strong evidence of convergence .
A) for regions within a country.
") with develo&ing economies.
') leading to military conflict.
() of ca&ital stoc$s, rather than out&ut
Answer: A
**) Evidence that convergence occurs within economies is drawn in &art from the e%am&le of
.
A) Airoshima and +agasa$i Ka&an.
") +orth and South 8orea.
') 5est and East Germany during the 'old 5ar.
() Aong 8ong and Singa&ore.
Answer: A
*-) 3n the ty&ical !athtu!, the flow of water into the tu! is controlled !y a faucet inde&endently
of the #uantity of water in the tu!. Aow is the !athtu! analogy of the steady state in the Solow
model different6 Aow does this difference relate to the &henomenon of convergence6
Answer: 3n the Solow model, the flow of investment is determined !y the fi%ed rate of saving
and the varia!le level of out&ut, which de&ends on the stoc$ of ca&ital, the la!or in&ut, and the
availa!le technology. 3t is as if the faucet on the tu! were controlled !y the level of water in the
tu!. The convergence &henomenon is that economies with low &er ca&ita income have relatively
high growth rates. "ut for economies to converge, all of the determinants of out&ut must !e
similar. Thus, it is not sur&rising that convergence is not found among large grou&s of countries.
Among suita!ly similar economies, evidence of convergence is stri$ing testimony of the
im&ortance of diminishing returns. (es&ite the low level of investment that is feasi!le in a low=
income economy, the growth im&act of new ca&ital there is greater than occurs in an otherwise
similar high=income economy in which the level of investment is higher.
Solow Diagra
1*
*.) Dn the diagram a!ove, show the #uantity of consum&tion &er wor$er in e#uili!rium. 3f the
actual ca&ital &er wor$er were greater than $L, would consum&tion !e higher or lower than it is
in e#uili!rium6 (escri!e what would ha&&en in an economy with such a high level of ca&ital &er
wor$er.
Answer: 5hen ca&ital &er wor$er is a!ove its e#uili!rium value, out&ut &er wor$er is higher, so
each wor$er has more to consume. Total savingMinvestment is higher, as well, !ut not enough to
re&lace the ca&ital lost to de&reciation. As a result, ca&ital &er wor$er is falling, which !rings
out&ut and consum&tion down to their e#uili!rium levels.
*4) Dut&ut &er wor$er yt C .$
t
1M-
, the saving rate is -1 &ercent, and the de&reciation rate is
1.1--. 'alculate the steady=state values of ca&ital &er wor$er and consum&tion &er wor$er.
Answer: The steady=state ca&ital=la!or ratio $L C
4 . 1
sA
C *:. 'onsum&tion &er wor$er is N1 =

s) . *:
1M-
C ;...
6.- Saving )ate 'hanges in the Solow Fodel
1) A higher rate of saving at the national level will, in the long=run .
A) cause a decrease in levels of ca&ital and out&ut.
") have no effect on levels of ca&ital and out&ut.
') lead to an increase in &o&ulation growth.
() cause an increase in levels of ca&ital and out&ut.
Answer: (
To&ic: 6.- Saving )ate 'hanges in the Solow Fodel
*) Dn the Solow (iagram, an increase in the saving rate is shown !y .
A) an u&ward shift of the de&reciation line
") an u&ward shift of the investment function
') an u&ward shift of the &er=wor$er &roduction function
() a downward shift of the investment function
Answer: "
-) An increase in the saving rate results in a higher steady state .
A) growth rate of ca&ital
") growth rate of out&ut &er wor$er
') level of consum&tion &er wor$er
() level of ca&ital &er wor$er
Answer: (
.) 3n the Solow model, the faster growth of out&ut that results from an increase in the saving rate
1-
is tem&orary, !ecause .
A) of diminishing marginal &roduct of ca&ital
") with a larger stoc$ of ca&ital, consum&tion is encouraged more than investment
') the rising ca&ital stoc$ de&reciates at a faster rate
() the economy settles into a steady state in which saving no longer rises
Answer: A
4) >ollowing an increase in the saving rate, consum&tion &er wor$er .
A) increases
") decreases
') is unaffected
() may either rise or fall
Answer: (
6) Su&&ose an economy is in a steady state, then its saving rate falls, once and &ermanently. As
the economy a&&roaches its new long=run steady state, consum&tion &er wor$er is .
A) falling
") rising
') unaffected
() either rising or falling
Answer: A
:) 3nternational evidence on the relationshi& of &er ca&ita income and the saving rate suggests
that .
A) a high level of income &er &erson re#uires a high saving rate
") a high saving rate guarantees a high level of income &er &erson
') a high saving rate might result in a high level of income &er &erson
() a high saving rate re#uires a high level of income &er &erson
Answer: '
1.
;) 3n a steady=state economy with no &o&ulation growth, out&ut &er wor$er is -4, the saving rate
is *1 &ercent, and the de&reciation rate is 11 &ercent. The level of ca&ital &er wor$er is
.
A) 6.
") 1<
') -<
() *;
Answer: A
<) 3n a steady=state economy with no &o&ulation growth, ca&ital &er wor$er is ;6, the saving rate
is *4 &ercent, and the de&reciation rate is 11 &ercent. The level of out&ut &er wor$er is .
A) 1<4
") -;
') -4
() .:
Answer: "
11) 3n a steady=state economy with no &o&ulation growth, consum&tion &er wor$er is .4, the
saving rate is *4 &ercent, and the de&reciation rate is 14 &ercent. The level of ca&ital &er wor$er
is .
A) :4
") -6
') 111
() *:
Answer: '
14
Solow Diagra
11) Dn the diagram a!ove, show the new steady=state ca&ital=la!or ratio that results from a
decrease in the saving rate. 'an you say what has ha&&ened to the e#uili!rium level of
consum&tion &er wor$er6
Answer: As savingMinvestment falls, the e#uili!rium ca&ital=la!or ratio declines along the
de&reciation line. As the ca&ital=la!or ratio falls, out&ut=&er=wor$er declines along the &roduction
function. "eginning from the original e#uili!rium $L on the gra&h, the &roduction function is
clearly flatter than the de&reciation line, so the decline in out&ut is smaller than the decline in
savingMinvestment, so that consum&tion &er wor$er must !e rising. 'onsum&tion &er wor$er can
fall only if $L is so low that the slo&e of the &roduction function Nat that level of ca&ital &er
wor$er) is stee&er than the de&reciation line.
1*) 'onsum&tion &er wor$er is :*, de&reciation is 1*.4E, and ca&ital &er wor$er is 6.. Given the
&roduction function y C *1$
1M-
, show that this economy is in a steady state. 3f the saving rate
should dou!le, what is the new steady=state level of consum&tion &er wor$er6
Answer: The steady=state ca&ital=la!or ratio $L C
4 . 1
sA
. 2lugging the values a!ove into this

e#uation yields s C 1.1. 2utting the given value of $ into the &roduction function yields y C ;1, so
the given value of consum&tion &er wor$er im&lies s C 1.1. This is a steady state. NAs further
confirmation, note that 6. 1.1*4 C ; C saving, so the loss of ca&ital due to de&reciation is
e%actly restored !y investment.) 3f s C 1.*, then $L C 1;1, so y C 11-, and consum&tion &er
wor$er is 11- 1.; C <1.
16
6.. 2o&ulation Growth in the Solow Fodel
1) Dther things the same, in the Solow model in the steady state, a higher rate of &o&ulation
growth the level of out&ut &er wor$er.
A) leads to an increase in
") has no long=run effect on
') has an am!iguous effect on
() leads to a decrease in
Answer: (
To&ic: 6.. 2o&ulation Growth in the Solow Fodel
*) Dther things the same, in the Solow model in the steady state, a higher rate of &o&ulation
growth growth rate of out&ut.
A) leads to a higher
") leads to a lower
') has no long=run effect on the
() has an am!iguous effect on the
Answer: A
-) Dther things the same, in the Solow model in the steady state, a higher rate of &o&ulation
growth growth rate of out&ut &er wor$er.
A) leads to a higher
") leads to a lower
') has no long=run effect on the
() has an am!iguous effect on the
Answer: '
.) 2o&ulation growth is similar to de&reciation, in that .
A) each lowers the ca&ital=la!or ratio
") each tends to encourage saving
') ca&ital wears out faster when used !y more wor$ers
() each hel&s to e%&lain how economies can sustain a &ositive growth rate of out&ut
Answer: A
1:
4) 3f out&ut &er wor$er in a steady state is O-1,111, de&reciation is 1-E, the &o&ulation growth
rate is two &ercent, and the saving rate is *1E, what is the steady state ca&ital=la!or ratio6
A) O11,411
") O;4,:1.
') O**,411
() O.1,111
Answer: (
6) Dut&ut &er wor$er is 41, the saving rate is 14 &ercent, the &o&ulation is growing at one
&ercent, de&reciation is < &ercent, and the ca&ital=la!or ratio is ;1. 'onsum&tion &er wor$er is
.
A) -:.4
") falling
') :4
() 6;
Answer: "
:) ?'a&ital dilution? refers to .
A) the flow of investment in the ?!athtu! model?
") the de&reciation of ca&ital associated with an increase in the &ercentage of younger wor$ers
') the decline in the marginal &roduct of ca&ital that results from reliance on new, ine%&erienced
wor$ers
() the decrease in ca&ital &er wor$er that is a direct conse#uence of an increase in the num!er of
wor$ers
Answer: (
;) Dn the Solow (iagram, an increase in &o&ulation growth is shown !y
A) an u&ward shift of the de&reciation &lus ca&ital dilution line
') an u&ward shift of the &er=wor$er &roduction function
Answer: A
1;
<) The im&act of immigration on an economy@s steady state ca&ital=la!or ratio is reduced to the
e%tent that the immigrants tend to than the native &o&ulation.
A) save more
") have higher fertility
') have lower income
() !e younger
Answer: A
11) A Dne='hild 2olicy was instituted in 1<:< in .
A) "ra7il.
") South Africa.
') 3ndia.
() 'hina
Answer: (
11) According to the Solow model, a !enefit of &olicies to limit &o&ulation growth might !e
.
A) that smaller families are more li$ely to contri!ute to technological advances
") that smaller families have !etter access to !irth control methods and devices
') that smaller families might &rovide each &erson a larger share of national income
() that smaller families have less need to save, and so en/oy higher consum&tion
Answer: '
1*) Evidence of a negative correlation !etween income &er ca&ita and &o&ulation growth rates
.
A) im&lies that !irth control is most effective in low=income countries
") has not !een found in the availa!le data
') is consistent with the Solow model
() suggests that &o&ulation growth stimulates technological &rogress
Answer: '
1<
Solow Diagra
1-) The diagram a!ove shows a steady state with a constant #uantity of la!or. Show on the
gra&h how the steady state is determined if the la!or force is growing at some constant rate. Dn
the gra&h, show how to measure the change in consum&tion &er wor$er that results from growth
of the la!or force.
Answer: Gra&hing answers will vary.
6.4 2roductivity Growth in the Solow Fodel
1) 5hen an economy e%&eriences a one=time increase in &roductivity, there is an immediate
increase in .
A) the saving rate
") the ca&ital=la!or ratio
') the de&reciation rate
() consum&tion &er wor$er
Answer: (
To&ic: 6.4 2roductivity Growth in the Solow Fodel
*) 5hen an economy e%&eriences a one=time increase in &roductivity, there is an increase in the
long=run, steady state value of .
A) the growth rate of out&ut
") the de&reciation rate
') consum&tion &er wor$er
() the saving rate
Answer: '
*1
-) 'om&aring steady states, which of the following is a result of a &ermanent increase in the
saving rate, !ut is not a conse#uence of a one=time increase in &roductivity6
A) an increase in consum&tion &er wor$er
") a decrease in the marginal &roduct of ca&ital
') an increase in out&ut &er wor$er
() an increase in the growth rate of out&ut
Answer: "
.) Dn the Solow (iagram, an increase in &roductivity is shown !y
A) an u&ward shift of the de&reciation &lus ca&ital dilution line
') a downward shift of the de&reciation &lus ca&ital dilution line
Answer: "
4) 3f &roductivity is growing at some sustained rate g, then out&ut and ca&ital &er wor$er
.
A) are growing at the same rate g, in a sta!le steady state
") are growing faster than g, !ecause im&roving technology encourages a higher rate of saving
and investment
') are growing slower than g, !ecause some of the new ca&ital is merely re&lacing o!solete
ca&ital
() are growing faster than g, !ecause &roductivity does not suffer from diminishing marginal
&roduct
Answer: (
6) The Solow model im&lies that continuous growth in &roductivity at a rate of one &ercent will
result in continuous growth of out&ut &er wor$er at a rate of 1..-E. Thus, if at a &oint in time
out&ut &er wor$er is *:1 and &roductivity rises !y one &ercent, the resulting level of out&ut &er
wor$er is
A) -;6
") *:-
') *:.
() *::
Answer: '
*1
:) A ma/or contri!ution of the Solow model is its .
A) insight into what distinguishes rich economies from &oor economies
") e%&lanation of why &roductivity grows over time
') demonstration that the $ey to sustained growth is a high level of saving
() encouragement of &olicies to limit &o&ulation growth
Answer: A
;) 3n theory, differences in out&ut across economies and over time might !e the result of
differences in either ca&ital in&ut, la!or in&ut, or &roductivity. The evidence &oints clearly to
&roductivity as a more li$ely and &owerful source of growth differences. 5hich as&ects of the
Solow growth model hel& to e%&lain why the in&uts of ca&ital and la!or contri!ute little to
growth of out&ut, relative to &roductivity6
Answer: (iminishing marginal &roduct undermines the im&act on out&ut of increases in either
ca&ital or la!or. As long as the la!or in&ut grows, and saving is sufficient to com&ensate for
de&reciation and ca&ital dilution, out&ut can grow at the same rate as the la!or in&ut. >aster
growth is &ossi!le during recovery from an event that has reduced the ca&ital=la!or ratio, or in
res&onse to an increase in the saving rate. "ut such growth e&isodes end as the ca&ital=la!or ratio
a&&roaches a steady state. A growing stoc$ of ca&ital has a diminishing effect on out&ut, on the
one hand, and a linearly=increasing reliance on saving from out&ut on the other. 2roductivity is
su!/ect neither to diminishing marginal returns nor to de&reciation P dilution, so nothing
im&edes the connection from &roductivity growth to out&ut growth.
**
<) Given the &roduction function B C A 8
1.-
9
1.:
and fi%ed values for the saving rate and
de&reciation, if &roductivity is growing at an average rate of three &ercent, and the la!or in&ut
grows at two &ercent, there is a uni#ue growth rate of ca&ital that is sustaina!le. That is, if the
growth rate of ca&ital is either higher or lower than this steady=state value, then it must
eventually change, even if nothing else in the economy changes. 'alculate this steady=state
growth rate of ca&ital, and e%&lain why it alone is a sustaina!le rate. QAint: Use the fact that the
growth rates of out&ut and ca&ital &er wor$er are .-E higher than the growth rate of
&roductivity.R
Answer: Since &roductivity is growing at three &ercent, ca&ital &er wor$er is growing at ..-E
N C 1.1- 1..-). Since la!or grows at two &ercent, ca&ital must grow at ..-E I *E C 6.-E.
2utting this into the growth accounting e#uation: C 1.1- I 1.- 1.16- I 1.: L 1.1* C 1.16-.
Thus, ca&ital and out&ut grow at the same rate. 3f ca&ital were to grow at a faster rate, say eight
&ercent, the growth of out&ut could not $ee& u&: 1.1- I 1.- 1.1; I 1.: 1.1* C 1.16;. A
growing ca&ital stoc$ re#uires enough saving to com&ensate for de&reciation and ca&ital dilution,
!ut saving can increase only as fast as out&ut. 3f the growth rate of ca&ital were too low, say five
&ercent, out&ut would !e growing faster than ca&ital, so saving a constant fraction of out&ut
would result in investment that is increasingly large relative to de&reciation and ca&ital dilution.
The investment needed to $ee& ca&ital growing at a constant rate can occur only when out&ut
grows at the same rate as the ca&ital stoc$.
6.6 Summing U& the Solow Fodel
1) There are no #uestions for this section.
Answer:
*-

Chapter 6 Mishkin

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Chapter 6 Mishkin

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Macreconomics: Policy and Practice (Mishkin)

Chapter 6 The Sources of Growth and the Solow Model

C *:. 'onsum&tion &er wor$er is N1 =

. 2lugging the values a!ove into this

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