Consider the Solow
growth model with no technical progress, a constant rate of depreciation of
capital d, a constant
rate of growth of the labour force n and an intensive production function
A{t) = A ln [1 +
k(t)], where A is a positive constant, y(t) is output per unit of labour at
time t and
k(t) is capital per
unit of labour at time t. Suppose we replace the assumption of a constant
saving rate in the
economy by the assumption that workers earn only wage income and
consume their entire
income while the remaining income accrues to non-workers who save their
entire income.
Assuming that factor rentals are equal to respective marginal products, answer
the following
questions :
Suppose the parameters
n and d have the values 0. 02 and O. 05 respectively. Which of the following is
necessary and sufficient condition for steady state
growth path (with
positive output) in the model?
(a) A > .07
(P) A /(1+A) > .07
(c) A/(1+A)>0.03
d) ln(A/(A-1))> .07
Suppose the parameters
n and d have the values 0.01 and 0.0l respectively. Assuming
that a steady state
growth path exists, which of the following is a necessary condition
for it to be unique
and stable?
(a) A/(1+A) > O.02
(b) A/(1+A) >o.2
: (c) ln[A/(A-1))
>0,02
(d) None of the above
Suppose Economy 1 and
Economy 2 have identical values of n and d but Economy 1
has a higher value of
A. Suppose in both economies there exists a unique and stable
steady state growth
path. Which economy has a higher rate of interest along the steady
state growth path?
(a) Both economies
have the same steady state rate of interest
(b) Economy 2
(c) Economy 1
(d) More information
is necessary to answer the question
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