Provide correct explanations and answers
7.1 The table gives data on government recurrent expenditure, G. investment, /, gross domestic product, Y, and population. P. for 30 countries in 1997 (source: 1999 International Monetary Fund Yearbook). G. I, and Y are measured in USS billion and P in million. A researcher investigating whether government expenditure tends to crowd out investment fits the regression (standard errors in parentheses): / = 18.10-1.07G + 0.36Y R = 0.99. (7.79) (0.14) (0.02) G P Country G Y P Australia 94.5 75.5 407.9 185 Netherlands 73.0 49.9 360.5 15.6 Austria 46.0 39.2 206.0 81 New Zealand 129 99 65.1 3.8 Canada 119.3 125.1 631.2 30.3 Norway 353 30.9 153.4 4.4 Czech Republic 16.0 10 5 52.0 103 Philippines 20.1 10 7 82.2 78.5 Denmark 34.2 42.9 169.3 5.3 Poland 28.7 23 4 135.6 38.7 Finland 20.2 25.0 121.5 5.1 Portugal 256 190 102.1 France 2559 347.2 1409.2 586 Russia 84 7 94.0 436.0 147.1 Germany 422 5 406.7 2102.7 821 Singapore 356 9.0 950 37 Greece 24.0 17.7 1 19.9 105 Spain 109 5 86.0 $320 39 Iceland 14 1.5 7.5 03 Sweden 31.2 58.8 227.8 89 Ireland 143 10,1 73.2 3.7 Switzerland 50:2 38.7 2560 7.1 Italy 190.8 189.7 1 1454 $75 Thailand 48.1 15.0 153.9 60.6 Japan 1059 376.3 39013 126.1 Turkey 50.2 23.3 189.1 Korea 1549 49.3 442.5 46.0 UK 210 1 230.7 1256.0 582 Malaysia 416 108 973 21.0 USA 1517.7 1244.1 51109 2679 She sorts the observations by increasing size of Y and runs the regression again for the 11 countries with smallest } and the 11 countries with largest Y. RSS for these regressions is 321 and 28101, respectively. Perform a Goldfeld Quandt test for heteroskedasticity.[311. Solow Growth Model. [it] marks] Consider the production function for a closed economy 1" =2 - snowy\"?- Assume that the savings rate 5 equals 26% and the depreciation rate 5 equals 5%. Further, assume the growth rate of the labor force g\" is 3% and the growth rate oftechnological progress gA is 2% per year. a. Find the steady state values of [i] capital per effective worker, {ii} output per effective worker, {iil the growth rate of output per effective worker, [iv] the growth rate of output per worker, and {v} the growth rate of output. {2.5 marks} Now we modify the basic Solow growth model described above, by including government spending as follows. The government collects taxes T to finance its government spending G in every period. Government spending per worker is given by a constant g, where g= G! N. Workers consume a fraction of disposable income C: {1s]|I[YTj|. Suppose that the government has a balanced budget. Also assume that A: l and the growth rates of technological progress and the labor force are zero, gA=, gN= (l. b. Write down the capital accumulation equation. With the help of a diagram, illustrate that there can be two steady-state values of capital per worker lk*=K*fN]. Carefully label your diagram. [3.5 marks] c. We can focus on the high k* and ignore the low k." because the low k* is an unstable steady state. What is the effect of an increase in g on it\"? What are the effects of an increase in g on aggregate consumption C? Explain. {2 marks} d. How we modify the way we dene government spending. Suppose that govemment spending G is proportional to aggregate output Y, where G: z'f. That is, government spending is a fraction 2 of aggregate output 'I'. Are there two steady-state values of capital per worker?I What are the effects of an increase in 2 on capital per worker k* and aggregate consumption C? Explain. [2 marks} 2. The Ramsey-Cass-Koopmans model assumes that government purchase do not affect utility from private consumption. However, the opposite view is that government purchases and private consumption are perfect substitutes. Suppose that the modified utility function in the Ramsey- Cass-Koopmans model is given by +00 e -Bt [c(t)+G()]1-6 U = B 1-0 dt. -00 Where B = A(0)1-L(0)/H and B = p - n - (1 -0)g. If households' preferences are given by U and if the economy is initially on its balanced growth pat, what are the effects of a temporary increase i government purchases on the paths of consumption, capital, and the interest rate? [33.3]
