Problems 1. You should be able to tell whether the following statements are true

Question

Problems 1. You should be able to tell whether the following statements are true, false or uncertain and also be able to justify your answer. (i) If the rate of technological progress increases, the investment rate (the ratio of investment to output) must increase in order to keep capital per effective worker constant. (i) In the steady-state output per effective worker grows at the rate of population growth. (ii) In the steady-state output per worker grows at the rate of technological progress. (iv) A higher saving rate implies a higher level of capital per effective worker in the steady state, and thus a higher rate of growth of output per effective worker. 2. Suppose policy makers pass a budget that results in an increase in the budget deficit. Also assume that this fiscal policy action results in a reduction in the saving rate. To what extent will this reduction in the saving rate cause permanent changes in the rate of growth of output per worker? Explain

Explanation / Answer

1) i) The statement is True.

Investment rate depends upon the technological progress.The investments need to increase with the rate of technology to maintain the capital stock.

ii) The statement is False.

while Output grows at the rate of population growth but output per effective worker remains the same.

iii) The statement is True

Output growth rate depends only on the population growth and the rate of technological progress.

iv) The statement is False

In the steady state,capital per effective worker is constant.so,the capital grows at the rate of population growth.Change in the saving rate increases the steady state output level per effective worker.

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