Problem set 2 2020 - Andrea Caggese PDF

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Advanced Macroeconomics I, UPF (2020) Professor Andrea Caggese PROBLEM SET 2

Question 1) Solow model basics Describe how, if at all, each of the following developments affects the break-even and actual investment lines in our basic diagram for the Solow model. Also explain what happens to the growth rate of capital per efficiency worker. A) The rate of depreciation d increases B) The rate of technological progress a decreases.

Question 2) Solow model basics - continued Describe how, if at all, each of the following developments affects the break-even and actual investment lines in our basic diagram for the Solow model. Also explain what happens to the growth rate of capital per efficiency worker. C) Population growth rate n increases D) The production function is Cobb-Douglas, 𝑦" = 𝑓 𝑘" = 𝑘"& and capital’s share a decreases (we assume that 0 s L y is an exogenous fixed level of output per efficiency worker. So an economy will have a Where ~ ~ y . This can saving rate which depends on whether f (k ) is higher or lower than the exogenous value ~

happen, for example, if a sufficient level of resources is necessary to pay the fixed costs related to establishing a properly functioning financial market. Is it now no longer the case that two economies which are identical in everything except the initial level of capital per worker converge to the same balanced growth path? How does your answer depend on the assumptions about the values of the parameters of the model? Explain....