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29 Cards in this Set
- Front
- Back
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What does the Solow Growth Model show?
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How saving, population growth, and technological progress affect the level of output and growth overtime.
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What does the Solow Growth Model assume about the production function?
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That there is constant returns to scale.
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Per worker terms in the Solow Growth Model are denoted by what?
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Lowercase letters.
so, y = Y/L - output per worker k = K/L - capital per worker |
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Slope of the production function in the Solow Growth Model is called what and is denoted how?
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Marginal Product of Capital (MPK):
MPK = f(k+1) - f(k) **same as the MPL back in the early chapters** |
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output per worker (y) is separated into what two portions?
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Consumption per worker (c) and investment per worker (i).
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What are the labeled areas?
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1. consumption per worker
2. investment per worker 3. Output, f(k) 4. Investment, sf(k) 5. output per worker |
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Which two forces influence capital stock?
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Investment (expenditure on new plant and equipment)
Depreciation (wearing out of old capital) |
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investment per worker is expressed as
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i = sy
where i = investment per worker s = savings per worker y = output per worker |
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Why is investment expressed as sf(k)?
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because f(k) substitutes in for y and shows that workers invest the portion of their output that they save.
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δ represents what?
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The certain fraction of capital stock that wears out every year.
Depreciation rate. |
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How do you express the impact of investment and depreciation on capital stock?
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Δk = i - δk, but since i = sf(k), the equation becomes:
Δk = sf(k) - δk |
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δk is ____________ per ______
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depreciation; worker
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k* is the _____-_____ level of _______ ___ ______
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steady-state
capital per worker |
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k* is where which two things intersect?
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The depreciation per worker function (δk) and investment per worker (sf(k)).
so the steady-state capital per worker is a state where depreciation = investment |
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y = sqrt(k) is what?
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the per worker production function
(this is where Ashley wanted to 'memorize the end of the story.') |
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Steady-state k* is when investment per worker equals depreciation per worker, so how else is steady-state k* recognized?
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when Δk = 0.
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According to the Solow Growth Model, the ______ ____ is a key determinant of the ______-_____ _______ _____.
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saving rate; steady-state capital stock.
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If savings rates are high, capital stock grows. True or false.
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True. Output also increases.
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What is the golden rule of capital?
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k*gold
It is the steady-state value of k that maximizes consumption. Can be found by drawing a tangent line on the steady-state output curve f(k*) |
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How do you find the steady-state consumption per worker?
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c* = f(k*) - δk*
steady-state consumption is what is left after paying steady-state depreciation on steady-state output. |
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Below the Golden Rule point, what happens if steady-state capital is raised?
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steady-state consumption increases.
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Above the Golden Rule point, what happens if steady-sate capital is raised?
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steady-state consumption decreases.
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Golden Rule is expressed as k*gold but also as:
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MPK = δ
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When the economy begins above the Golden Rule state, does reaching the Golden Rule state produce higher consumption?
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Yes. At all times.
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The basic Solow Growth Model shoes that what by itself cannot explain sustained economic growth?
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Capital Accumulation
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What are two more sources of growth in the Solow Growth Model (outside of capital accumulation)?
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Technology advances
Population growth |
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True or False: in the Solow Growth Model, population and labor force are fixed.
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False.
Population and Labor Growth grow at a constant rate (n) each year in the Solow Growth Model. |
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What is the equation for change in capital stock per worker when one factors in population growth?
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Δk = i - (δ + n)k.
Substitute sf(k) for i. |
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How does population growth impact the steady-state of capital stock?
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It reduces it because it shifts the depreciation/population growth (δ + n)k up without moving the per worker investment.
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