Practice questions
March 8, 2023
Question 1: Multiple choice questions
1. Which of the following reasons contributes to the growth slowdown in capital
accumulation and output per worker in the Solow growth model?
(a) Constant population growth rate
(b) Constant saving rate
(c) Diminishing marginal product of capital
(d) No technological progress
2. In 2010 GDP per capita in the United States was $42, 189, whereas GDP per
capita in El Salvador was $3, 068. Suppose that income per capita in the United
States has been growing at a constant rate of 1.8% per year. Approximately
which year was income per capita in the United States equal to year 2010 income
per capita in El Salvador?
(a) 1872
(b) 1862
(c) 1903
(d) 1848
3. Consider a version of the Solow growth model in which output at time t is
determined by the production function Yt = 0.2Kt +0.8Lt . Capital depreciation
1
is given by dKt , where the depreciation rate is d = 0.2. Saving is given by sYt ,
where the saving rate is s = 0.5. Assume that population Lt is constant, i.e.
does not grow with time.
What is the steady state output per person, yss ?
(a) 1.6
(b) 1.4
(c) 1.8
(d) 2
4. Which of the following is inconsistent with the fertility transition (associated
primarily with a reduction in fertility rates) observed around the world?
(a) A widening of the gender pay gap at work
(b) An increase in the life expectancy at birth
(c) Skill-biased technological change increasing employer’s demand for better
educated workers
(d) The adoption of the welfare state with pensions and social security
5. Which of the following goods is best described as being nonrival and excludable?
(a) Flowers from a public park
(b) Air
(c) satellite television
(d) an ice cream
Question 2
Suppose that the Government decides to levy an income tax on both wage income
and capital income. Instead of receiving wL+rK = Y , consumers receive (1−t)wL+
(1 − t)rK = (1 − t)Y . Trace the consequences of this tax for output per worker in
the short and long run, starting from steady state.
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Question 3
Consider the Solow growth model without technical change, and a Cobb-Douglas
production function, Y = K α L1−α .
Extend the model by assuming that L, the labour force, equals pN , where N is the
population and p is the fraction that work. (For example, if N is 100 and p is 0.8,
then the labour force is 80). Assume that N grows at a constant rate n.
(a) Assume that the economy is in steady state. Derive formulas for (i) output per
Y
worker, YL ; (ii) output per person, N ; and (iii) total output, Y . The formulas
should include the usual parameters of the Solow model and possibly p and N
as well.
(b) Suppose that the economy starts in steady state, and then p rises. Using graphs,
Y
show the paths over time of YL , N and Y . Show how these three variables evolve
from the point in time when p rises until the economy is again in steady state.
1 Question 4
This question extends the environment of the Solow Model to introduce an additional
factor of production: land.
Suppose that output is produced according to the production function:
Y = K α T β [AL]1−α−β
where K is capital, L is the labor force and T denotes land.
Assume that α > 0, β > 0 and 1 − α − β > 0.
The accumulation equation for K is identical to the basic Solow Model (with saving
rate s and depreciation rate δ), while L and A grow at rates n and g respectively.
Since the amount of land on earth is fixed, we assume that Ṫ = 0.
(a) Derive the growth rate of output per worker ( YL ), denoted by gY /L , along the
balanced growth path
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(b) Land limitations reduce growth since land per worker falls over time. To gauge
how much this limitation reduces growth, consider an economy identical to the
one we have just considered other than that we now assume that land grows as
population grows:
Ṫ
=n
T
Derive the growth rate of output per worker, denoted by g̃Y /L , along the bal-
anced growth path under these assumptions.
(c) Suppose β = γ = 0.1, n = 0.03, α = 1/3. Compute the difference in growth
rates: g̃Y /L − gY /L for these parameter values.