Macroeconomics Question

1. Long-run figures for the economy are reported in TABLE 1

TABLE 1

Long-run growth figures

Capital-share of income 20%

Population growth rate 1%

Capital stock growth rate 7%

Output growth rate 5%

Assume that the country’s production function is a constant-returns-to-scale Cobb-Douglas, Y = AK

a L

b , where Y is real national income, K is national

capital stock and the total factor productivity is represented by A. Total population coincides with total workers and is denoted by L.

(a) compute the Solow residual - state clearly/describe the formula you are using - compute the mathematical result

Now consider some additional data provided reported in TABLE 2

TABLE 2

Ministry of Commerce

Depreciation rate of capital 0.1

Marginal propensity of consumption

0.75

(b) Determine the steady state level of ‘consumption per human-capital-

augmented efficiency units of labour’ ( c~ )

- state clearly/describe the formula you are using - compute the mathematical result

(c) Derive the growth rate of consumption-per-worker in the steady state

( cc )

- state clearly/describe the formula you are using - compute the mathematical result

(d) Sketch graphically the representation of the steady state and

illustrate what happens to the steady state when there is an increase in the rate of population growth. Explain your answer by discussing whether or not that is in line with the empirical evidence.

- state clearly/describe the graph you are using - describe clearly the changes that occur to the graph and compare

the final result with the initial situation - give an economic intuition of the result, within the context of

the model - talk about the empirical evidence illustrated in class in relation

to the effects of the exogenous change on the endogenous variables.