Question
Statistical data show an impressive positive growth trend in South Korea between 1970 and 2020. Economists adopted the Solow model for the analysis of the
Statistical data show an impressive positive growth trend in South Korea between 1970 and 2020. Economists adopted the Solow model for the analysis of the Korean growth miracle and argued that capital accumulation and technological progress drove the growth process.
a)Draw a (large enough) Solow model diagram for the economy of South Korea in 1970. Label per person output, investment, and depreciation functions and write formulas for each function you plotted. Assuming the country's capital stock was below the golden-rule capital stock level in 1970, label it as kstst.
b)Illustrate the effects of a saving rate increase that took place between 1970 and 2020 in the Korean economy. Assume that the golden-rule steady state level of capital was reached and label it kgr. Describe how key macroeconomic variables have changed relative to part A.
c)Explain how you found the golden-rule capital stock and why it is called so.
d)Next, show effects of technological progress on the economy. Assume Korea achieves the golden-rule steady- state again and comment on changes between parts B and D.
BONUS: Why did not the economists mention monetary policy as a driver of economic growth in Korea between 1970 and 2020? If you were to include monetary policy in your analysis, how would your Solow diagram change?
NOTE: you are welcome to draw a single (large enough) diagram to illustrate your answers to parts A-D. Alternatively, you can choose to draw one diagram for parts A-B and another for parts B-D if you feel your work will be more legible then.
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