Q1. Suppose that all economies have the same value forcapital's share of income. A developed country has a saving rate of28% and a population growth rate of1% per year. Aless-developed country has a saving rate of10% and a population growth rate of4% per year. In bothcountries, the rate oflabour-augmenting technological change is2% peryear, and capital depreciates at4% per year. Use the information in the question and the Solow model to explain whether it is likely that per capita GDP in these two countries will converge.

a. The level of real GDP per capita in these two countrieswill:

A.

not converge because the saving rate and population growth rate in the developed country imply very little dilution and a highersteady-state capital-labourratio, leading to a higher per capita GDP and overall GDP.

B.

converge because the developed country is saving at a much higherrate, whereas theless-developed country is investing more and saving less. This would imply a much highersteady-state capital-labour ratio for theless-developed country.

C.

not converge because theless-developed country has both a higher rate of investment as well as population growth. The highersteady-state capital-labour ratio for theless-developed country means slower overall GDP growth.

D.

converge because the high population growth rate in theless-developed country will lead to a bigger workforce that will eventually have a higher per capita income than the developed country. There is very little dilution in theless-developed country.

b. Are the countries likely to converge to the same growth rate of real GDP percapita?

A.

If the countries exhibit absolute convergence to their own steadystate, research indicates the countries will converge to the same steady state rate equal to the population growth rate of1% per year.

B.

If the countries exhibit absolute convergence to their own steadystate, research indicates the countries will converge to the same steady state rate equal to thelabour-augmenting technological rate of2% per year.

C.

If the countries exhibit conditional convergence to their own steadystate, research indicates the countries will converge to the same steady state rate equal to thelabour-augmenting technological rate of2% per year.

D.

If the countries exhibit conditional convergence to their own steadystate, research indicates the countries will converge to the same steady state rate equal to the population growth rate of4% per year.

Q2. In the Solow growthmodel, if two countries are otherwise identical(with the same productionfunction, same savingrate, same depreciationrate, and same rate of populationgrowth) except that Country Large has a population of one billion workers and Country Small has a population of 10 millionworkers, then thesteady-state level of output per worker will be______ and thesteady-state growth rate of output per worker will be______.

A.

higher in CountryLarge; higher in Country Small

B.

higher in CountryLarge; higher in Country Large

C.

higher in CountrySmall; higher in Country Small

D.

the same in bothcountries; the same in both countries

Q3. The government allows households to savetax-free for retirement through RRSPs. Suppose that these plans increase the national saving rate.

a. Use the AK growth model to explain what effect would these plans have on the growth rate of the standard ofliving?

A.

These policies would be expected to increase the growth rate of the standard of living because endogenous growth models show that increased saving rates would lead to higher sustained rates of growth in capital and technology.

B.

These policies would be expected to increase the growth rate of the standard of living because increased saving rates will lead to higher steady state levels and would increase the sustained rates of growth in capital and technology.

C.

These policies would be expected to decrease the growth rate of the standard of living because increased saving rates would only lead to higher steady state levels but this would reduce the rates of growth in capital and technology.

D.

These policies would be expected to decrease the growth rate of the standard of living because endogenous growth models show that increased saving rates would lead to lower sustained rates of growth in capital and technology.

E.

These policies would be expected to have no impact on the growth rate of the standard of living because endogenous growth models show that increased saving rates would lead to higher sustained rates of growth in capital and technology.

b. Suppose that these plans also reduce government revenue and government saving. Using the AK growthmodel, the growth rate of the standard of living _____ when government revenue is not impacted.

• will decrease by a smaller amount than
• will increase by the same amount as
• will decrease by the same amount as
• will increase by a smaller amount than

Q4. Suppose that the per hour worked form of the production function for an economy is given by y=10k1/4. The depreciation rate is 17% and the saving rate is 23%.

a. Thesteady-state capital-labour ratio for this economy is _____

(Round your response to two decimalplaces.)

b. Thesteady-state real GDP per worker hour for this economy is _____

(Round your response to two decimalplaces.)

c. Thesteady-state investment per worker is _____ and thesteady-state level of consumption is _____

(Round your responses to two decimalplaces.)

Q5. An article in the Economist about economic growth in Africa contains the followingstatement:

"One (of the big drivers ofAfrica's growth) is the application of technology. Mobile phones have penetrated deep into the bush. More than 600m Africans haveone; perhaps10% of those have access to mobileinternet services. The phones make boons like savings accounts and information on crop prices ever moreavailable."

Source: "The Sun ShinesBright: TheContinent's Impressive Growth Looks Likely toContinue," Economist, December3, 2011.

Using the AK growthmodel, which of the following is not likely to occur in Africa from this technologicalchange?

A.

The growth rate of the standard of living in these countries will likely increase as this technological change occurs.

B.

The growth rate of captial in these countries should increase because the growth rate of national saving will increase.

C.

The population growth rate should increase as the technological change increases the production function which will raise the growth rate of the standard of living in these countries.

D.

The techinological change should make savings accounts moreavailable, which would likely increase the amount of national saving in these countries.