Problem Set #4 1. An economy is in a steady state with no productivity change. B

Question

Problem Set #4 1. An economy is in a steady state with no productivity change. Because of an increase in acid rain, the rate of capital depreciation rises permanently A. According to the Solow model, what are the effects on steady-state capital per worker, output per worker, consumption per worker, and the long-run growth rate of the total capital stock? B. In an endogenous growth model, what are the effects on the growth rates of output, capital, and consumption of an increase in the depreciation rate of capital?

Explanation / Answer

Answer:- An economy in a steady state with no productivity change. Because of an increase in acid rain, the rate of capital depreciation rises permanently.
a. According to the Solow model, what are the effects on the following:

i. Steady-state capital-labor ratio: - there will be a decline in the steady –state capital –labor ratio due to increased capital depreciation.

ii. Output per worker:- This will also be impacted negatively and thus there will be a decline in the output per worker.

iii. Consumption per worker:- As the output per worker reduces, it will hamper their wage and therefore consumption per worker will also decrease.

iv. Long-run growth rate of the total capital stock:- There will be no change in it.

Answer:- b. Now, according to the endogenous growth model, what are the effects on the following:
i. Growth rate of output: - it will decrease
ii. Growth rate of capital: - there will be a decline in the growth rate of capital
iii. Growth rate of consumption:- The value of this factor will also reduce.

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