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New Economic School


Macro I (Module I, 2014-2015)
Homework Assignment #2
Due: Friday September 20, 2014 (before 5 p.m.)
All assignments should be written in English.
You should return your own HAs. You can return your HA either in electronic or paper format. If
you chose the latter, please answer each problem in a separate notebook. The total number of points
is 100.
Problem 1 (True / False / Uncertain) (18 points)
Based on the information obtained from class, please, label each of the following statements true,
false, or uncertain. Explain briefly.
1 The saving rate is always equal to the investment rate.
2 The higher the saving rate, the higher consumption in the steady state.
3 A higher saving rate alone cannot sustain higher growth of output forever. However, with
technological progress, a higher saving rate affects the growth rate of output in the long-run.
4 Capital accumulation does not affect the level of output in the long run; only technological
progress does.
5 The golden-rule level of capital tells us that the highest level of consumption in steady-state is
achieved when the saving rate is equal to 0.
6 Education increases human capital and thus output. It follows that governments should always
subsidize education.

Problem 2 (Solow Model) (32 points)


Suppose that the production function is given by Y = K 1/3 N 2/3 . Assume that the size of the
population, the participation rate, and the unemployment rate are all constant.
1 Derive the steady-state levels of capital per worker in terms of the saving rate, s, and the
depreciation rate, .
2 Derive the equation for steady-state output per worker and steady-state consumption per
worker in terms of s and .
3 Suppose that d = 0.1 and s = 0.2. Compute the steady-state output per worker, capital per
worker, and consumption per worker.
1

4 Now assume that the saving rate decreases to s = 0.15. Calculate the steady-state output per
worker, capital per worker, and consumption per worker.
5 Explain what happens to the level of output per worker and the growth of output per worker
when the saving rate decreases from s0 = 0.2 to s1 = 0.15.
6 Use any spreadsheet software to compute steady-state output per worker and steady-state
consumption per worker for s = 0.2, s = 0.195, s = 0.19, s = 0.185, . . . , s = 0.15. Explain
the intuition behind your results. Show the transition from s0 to s1 graphically. [Hint: graph
the steady-state level of output per worker and the steady-state level of consumption per worker
as a function of the saving rate (i.e., measure the saving rate on the horizontal axis of your
graph and the corresponding values of output per worker and consumption per worker on the
vertical axis).]
7 Calculate the savings rate that would maximize consumption per worker.
8 At s = 0.15, is this economy below or above its Golden Rule steady state?

Problem 3 (US Savings) (25 points)


This question explores the implications of the U.S. budget deficit for the long-run capital stock.
The question assumes that the United States will have a budget deficit over the life of this homework.
a Go to the 2013s edition of the Economic Report of the President 1 . From Table B-32, get the
numbers for gross national saving for 2011. From Table B-1, get the number for U.S. GDP for the
same year. What is the total saving rate as a percentage of GDP? Using the depreciation rate and
logic from problem 2, what would be the steady-state capital stock per worker (assuming that the
budget deficit holds in the future)? What would be steady-state output per worker?
b Take a further look at table B-32 for year 2011, and note that total saving includes both private
and public saving. Is the government running a surplus or a deficit? Note: You can separately get
the budget deficit as a percent of GDP in 2011 from table B-79 in the Economic Report of the
President (Your own calculation should be roughly equal to the 2011 official budget deficit).
c Using the reasoning from Problem 2, suppose that the federal budget deficit was eliminated and
there was no change in private saving. What would be the effect on the long-run capital stock per
worker? What would be the effect on long-run output per worker?
Problem 4 (Growth Accounting) (25 points)
Assume an economy is characterized by the following production function:
1/3

Yt = F (Kt , Nt ) = Kt (AN )2/3 .


Call gX , the growth rate of any variable X.
1

www.gpoaccess.gov/eop/. If the link does not work, go to www.gpoaccess.gov/eop/.

a What is gY gN ? What is gK gN . Express the growth rate of technological progress gA as a


function of (gY gN ) and (gK gN ).
b Rearrange the equation you just found in part (a) to solve for the growth rate of capital per worker
as a function of the growth rates of technological progress and output per worker.
c Now look at table 1 below.2 Using your answer to part (b), substitute in the average annual
growth rate of output per worker and the average annual rate of technological progress for the
United States for the period 1985 to 2009 to obtain a crude measure of the average annual growth
of capital per worker. (Strictly speaking, we should construct these measures individually for every
year, but we limit ourselves to readily available data in this problem.) Do the same for the other
countries listed in the table. How does the average growth of capital per worker compare across
the countries in this table? Do the results make sense to you? Explain.

. 1: Average Annual Rates of Growth of Output per Worker and Technological Progress in Four
Rich Countries since 1985

This table is the same as the one presented in lecture (see lecture notes #5).

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