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Practice Questions

This document contains [10] practice questions related to economic growth theory at a medium difficulty level. The questions cover topics such as the Solow growth model, endogenous growth models, Ramsey models, balanced growth paths, and the effects of parameters like the savings rate and population growth on long-run economic growth. Students are asked to derive expressions, interpret models, discuss results and compare different growth models.

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Krishna Murari
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44 views

Practice Questions

This document contains [10] practice questions related to economic growth theory at a medium difficulty level. The questions cover topics such as the Solow growth model, endogenous growth models, Ramsey models, balanced growth paths, and the effects of parameters like the savings rate and population growth on long-run economic growth. Students are asked to derive expressions, interpret models, discuss results and compare different growth models.

Uploaded by

Krishna Murari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PRACATICE QUESTIONS (DIFFICULTY: MEDIUM)

True/False

1. An economy that increases its saving rate will experience faster growth.

2. Once human capital is included, the Solow model does a good job at explaining
observed per capita income differences across countries.

3. Growth theory predicts that poor countries should grow faster than rich countries,
and researchers have found the evidence to be consistent with this prediction.

4. A Ramsey economy that starts above the golden rule capital stock will converge to
the golden rule. But if it starts below the golden rule it will also converge to a level
below the golden rule because impatient consumers are unwilling to sacrifice
consumption during the transition.

Consider the following model of growth. Output is given by

Y (t) = K(t)α[A(t)L(t)]1−α .
Capital and knowledge accumulate according to the equations
K˙ (t) = sY (t), s ∈ (0, 1),
A˙(t) = Y (t)φ , φ ∈ (0, 1).
The population grows at rate n.

1. Give an economic interpretation of the equation for the accumulation of knowledge.

2. For what value of φ does this model reduce to the Solow model?

3. Let and be the growth rates of knowledge and capital,


respectively. Find expressions for gA(t) and gK (t) in terms of A(t), K(t) and the
parameters.

4. Differentiate to obtain expressions for g˙A(t) and g˙K (t) in terms of gA(t), gK (t) and
the parameters. Draw the phase diagram in (gA,gK ) space.

5. Does the economy converge to a balanced growth path? If so, what are the growth
rates of K, A and Y on the balanced growth path?

Visit: ecomock.in
For Topic wise tests or for IIT JAM,DSE,ISI,JNU,IGIDR,CUCET
Contact: 9982322644
6. How does an increase in s affect long run growth? What about an increase in n?
What happens as φ gets close to one?

7. Do you think that this is a reasonable model to explain differences in growth rates
across countries?

Now endogenize savings by introducing a representative household with utility function

where ρ > 0, σ > 0 and . Assume that capital and labor


are paid their private marginal products. Households take their initial wealth and the paths
of interest rates and wages as given, and choose the path of consumption to maximize U .

8. What is the private marginal product of capital in this economy?

9. State the Euler equation and give an economic interpretation.

10. What are the growth rates of K, A, Y and C on the balanced growth path (don’t worry
about convergence to the balanced growth path)? How do these growth rates
depend on σ and ρ? Discuss your results, comparing them with the results derived
for a constant savings rate. If you cannot do the algebra, provide a discussion based
on your intuition.

Visit: ecomock.in
For Topic wise tests or for IIT JAM,DSE,ISI,JNU,IGIDR,CUCET
Contact: 9982322644
Visit: ecomock.in
For Topic wise tests or for IIT JAM,DSE,ISI,JNU,IGIDR,CUCET
Contact: 9982322644

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