School

Cornwall Central High School **We aren't endorsed by this school

Course

ECON 305

Subject

Economics

Date

Jul 17, 2023

Pages

2

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Solow Growth Model Questions
Solow Growth Model:
Rewriting the Solow growth model with both population growth n
and technology growth g in per capita per efficiency unit terms we get the equations
where kt is capital per capita per efficiency unit in period t; yt is output per capita per
efficiency unit in period t.
(a) Find an expression for the steady-state value of capital per capita per efficiency unit.
(b) There is a decrease in the population growth rate, n. Does this cause the steady state
value of capital per capita per efficiency unit to increase, decrease, or stay the same?
There is an decrease in the population growth rate, n. Does this cause the steady-state value
of capital per capita to increase, decrease, or stay the same? increase.
(c) In 2 to 3 sentences give intuition for your answer to the previous point.
Maintaining any given level of n becomes less 'costly' since there are now less 'newborns'
each period who need to be provided with capital. This leads a increase in the steady-state
level.
(d) Does this decrease in the population growth rate, n cause the value of capital per
capita to increase, decrease, or stay the same? What about the growth rate of capital per
capita? Explain your answer.
Answer is essentially the same as capital per capita per efficiency unit, except that now the
capital per capita in addition to the level shift from lower n also is growing at the
(unchanged) rate g (there will be a gradual transition in which growth rate is temporarily
higher).

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