4

. In the long run, the death rate (at the new steady state) will be

A) Greater

B) Lower

C) No change

D) Ambiguous

5

. Suppose that in the Solow model the long run capital per capita is 5

. Suppose that the current

capital per capita is 2

. Then current savings

A) Equals depreciation plus population growth

B) Is greater than depreciation plus population growth

C) Is greater than depreciation plus population growth

1 D) Cannot say with numbers provided

6

. Suppose that the world is a collection of countries each following the Solow model with the

same fundamentals (production function, population growth, depreciation), but different levels

of capital per worker

. Which of the following should happen:

A) The poor countries should grow faster than the rich

B) The rich countries should grow faster than the poor

C) All countries grow at the same rate

D) There is no growth in any country

The next four questions concern the Solow model

. Suppose the government discourages savings

by taxing capital and using the money to subsidize consumption

. Think of this as a decline in

the savings rate

. Answer the following questions about the effect on the economy relative to the

initial (pre-change) steady state:

7

. In the long run, output per person will be

A) Greater

B) Lower

C) No change

D) Ambiguous (cannot sign the change for certain)

8

. Compared to the original steady state, consumption per person in the new long-run steady state

will be

A) Greater

B) Lower

C) No change

D) Ambiguous (cannot sign the change for certain)

9

. Along the transition to the new steady state, output per person will be:

A) Increasing

B) Decreasing

C) Constant

D) Ambiguous (cannot sign the change for certain)

10

. In the new long-run steady state, the growth rate of output per capita compared to the original

steady state will be:

A) Greater

B) Lower

C) No change

D) Ambiguous (cannot sign the change for certain) 2 Short-answer questions

1

. Consider the effect of giving aid to a developing economy

. Let a be the amount of aid per person

given each year

. “Total income available” for a country in per capita terms is then y + a, where y

is the amount of domestic output per capita

. Start each economy from a steady state

.(a) Describe what happens in a Malthusian economy

. In particular, assume that what determines

mortality and fertility is total income available

. Describe what happens in the new steady

state to (a) per capita output produced, (b) per capita consumption (which is equal to per

capita total income available, as there is no saving in this model), and (c) population

.
(b) Describe what happens in a Solow economy

. In particular, assume that savings is an s

fraction of total income available (s is the saving rate)

. Describe what happens in the new

steady state to (a) per capita output produced, (b) per capita consumption, and (c) capital

per capita

.
(c) Drawing on your answers from above, do you think that aid will help the poorest countries grow faster? Give some intuition of why growth may have different effects given the

underlying nature of the economy

. 3