Ec4335

February 24th, 2015

Test 1

Name: Answer Key

SID:

Instructions. Write your answers on the test itself. If you have extra work to show, hand in the
additional sheets with this test, making sure you put your name on them. You may use a calculator.
You may not use your phone as a calculator. You may not use books, notes, or a computer. You
have 1.5 hours to complete the test.
There are 100 total points on the exam. Show your work in the long answers, partial credit will
be awarded when appropriate.
(5pts )

1. Which of the following is the equation showing how capital accumulates in a Solow model?
(a) logy = a + bg
(b) h = eu
(c) y = k
(d)
k = sy (n + )k

(5pts )

2. The annual growth rate of income per capita in the U.S. from 18702008 was approximately
(a) 0%
(b)
1.8%
(c) 5.0%
(d) 18.0%

(5pts )

3. Two countries have an identical steady state of k . Country A is at steady state, while country
B has k0 < k . Which of the following is true?
(a)
Income per capita in B will grow faster than A
(b) Income per capita in A will grow faster than B
(c) Income per capita in B will grow at exactly the same rate as A
(d) Income per capita in B will grow at exactly 0% per year

(5pts )

4. If the savings rate s rises in a country, which of the following is an accurate description of the
long-run effect?
(a)
(b)

(c)
(d)

The
The
The
The

long-run trend growth rate of economy rises

economy shifts up to a higher level balanced growth path (BGP)
economy stays on the same BGP as before
economy shifts down to a lower level BGP

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(5pts )

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Name: Answer Key

5. Production is described by Y = K W Z (AL)1 . Technology, A, grows at the rate

A/A
= g. All three capital stocks (K, W, Z) accumulate according to the typical Solow equation,
and the economy saves sK , sW , sZ of output to accumulate each. Along a balanced growth path,
how fast will income per capita, y, grow? (You dont have to show any work).
 1/(1)
sK sW sZ
(a)
n++g
(b) 0
(c) sK + sW + sZ
(d)
g

(5pts )

6. In class we compared Indian output per worker, y IN D , to U.S. output per worker, y US . Which
of the following is the best description of what makes India poor relative to the U.S.?
(a) The savings rate in India, sIN D , is only about 50% of the savings rate in the U.S., sUS
(b)
The technology level in India, AIN D , is only about 50% of the technology level in the U.S.,
AUS .
(c) The return to education in India, IN D , is only 5% per year, while in the U.S. US is 10%
per year
(d) India is farther south than the U.S.

(5pts )

7. During World War II, Germany suffered an incredible loss of physical capital. Following the
war, German income per capita grew at about 5.4% per year from 19501970. From 19702008,
it grew at only 1.6% per year. The high growth from 19501970 is an example of:
(a)

(b)
(c)
(d)

(5pts )

Transitional growth back to the original balanced growth path

A change in the growth rate of technology, g
A level shift down of the balanced growth path
Trend growth along a balanced growth path

8. In the Solow model with technology, which of the following describes output per worker at each
time along the balanced growth path
(a) 12
(b) Y = K (AL)1

/(1)
s
(c)
y(t) = +n+g
A(t)
/(1)

s
(d) y = +n+g

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(20pts )

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Name: Answer Key

9. In late 2015 the world is stunned by the arrival of advanced aliens on Earth. The aliens turn
out to be friendly, and use their techno-matter-transmorgifier to instantly create a enormous
stock of new physical capital for us to use. The capital stock in the U.S. goes from K 0 to K 1 ,
where K 1 > K 0 .
(A) What happens to the level of income per capita immediately after this new capital appears?
(B) What happens to the growth rate of income per capita immediately after this new capital
appears?
(C) What happens to the steady state level of income per capita in the U.S. after this new
capital appears?
(D) Draw a figure showing the time path of log income per capita (i.e. use a ratio scale) after
the aliens land, and then off to the distant future.
Solution: (A) The level rises immediately. If Y = K L1 , then y = k . If K jumps, then
so does output Y , and so does output per worker y. (B) To answer this, it is helpful to think
about part (C). From (C), we know that in the long run the economy will be no different than
before. That is, it will end up along the same trend line as before. Therefore, by having output
jump above that trend today, the growth rate must fall immediately after the capital arrives,
as the economy has to shrink back to the old trend line. (C) In the long run, there is no change
to any fundamental parameter (savings, population growth, depreciation), so the steady state
level of income per capita is exactly the same as it was before. There is no long-run effect of
this on the economy. (D) My figure has some trend growth rate built it, but you could also
have drawn this without trend growth (i.e. with ln y being flat in the long run)
ln y

T ime

(20pts )

10. Beginning in the 19th century, countries began entering what is called a Demographic Transition, where child-birth rates fell rapidly. As a result, population growth fell permanently from
n to n . Examine this change in the Solow model with technological progress, assuming the
economy begins in steady state.
(A) Draw the Solow diagram for this economy, showing the shift from n to n and how this
affects the steady state.

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Name: Answer Key

(B) Make a graph of how the log of output per worker evolves over time with and without the
change in population growth
(C) Make a graph of the growth rate of output per worker over time with and without the
change in population growth
(D) Does the Demographic Transition permanently change the growth rate, or the level of
output per capita?
Solution: (A) When population growth shifts down to n , this rotates the depreciation line
down in the Solow diagram. This means the new steady state is higher, because slower population growth allows capital per worker to be sustained at a higher level. The economy will

slowly transition from k to k .

n +

n +
sk

(B)

ln y

T ime

(C)

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Name: Answer Key

y/y

T ime

(D) Only the level.

11. Refer to the following plot of real GDP per capita for Uruguay and Brazil over the 20th century.
8000
6000

4000
Real GDP per capita

(20pts )

Uruguay

2000

Brazil

1900

1920

1940

1960

1980

2000

Year

(A) Based on the figure, do you find any evidence that the long-run growth rate, g, is different
in Uruguay and Brazil? Explain your answer.
(B) Based on the figure, do you find any evidence that there are permanent differences in
savings rates or population growth rates between Uruguay and Brazil? Explain your
answer.
Solution: (A) No. The reason is that while Brazil grows faster than Uruguay, it appears to be
transitional growth. That is, as Brazil gets close to Uruguays income per capita, the growth
rate slows down, and they appear to be heading off on similar balanced growth paths by the
end that have the same growth rate.

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Name: Answer Key

(B) No. If there were permanent differences in s or n, then this should show up as a permanent
difference in the level of the BGP betewen them. They appear, by the end of the figure, to be
on similar BGP, so cannot be any big difference. One could make the case that Brazils BGP
at the end is slightly lower than Uruguays, and so that would indicate a slightly lower s or
slightly higher n. Thats an acceptable answer as well.