Problem Set 2
Upload on Canvas by 11:59pm on February 14, 2019.
Problems1-3arebasedoffSolowmodel,Romermodelandclassdiscussion on institutions. Problems 4 -6 are based off Chapter 7. Problems 7 -9 are based off of chapter8.
Consider the following extension of the Solow model with exogenous produc- tivity growth. The expression for total output and the dynamics of capital per effective worker are given by the following expressions:
Y = Kα(AL)1−α
∆k = sy − (δ + g)k
where g is the growth rate of A, y is output per effective worker, and δ is the depreciation rate of capital.
Which of the following statements about the role of institutions in economic growth is TRUE and which of the following statements is FALSE? Explain.
Suppose the economy is on a balanced growth path in the Romer model, and then, in the year 2030, research productivity rises permanently to z¯j> z¯.
In this problem, you are asked to use the labor supply – labor demand frame- work developed in class. Illustrate the effect of various shocks using a diagram of labor supply and labordemand.
Suppose labor income starts at $50,000 and then grows at a constant rate of 2 per cent per year after that. Let wtbe labor income in year t, so that
wt= w0(1 + g)t,
where w0= 50, 000 and g = 0.02.
PDV = w0(1 + a + a2+ a3+ … + a45).
What is the value of a that you find?
Suppose that college education raises a person’s wage by $30,000 per year, from
$40,000 to $70,000. Assume that the interest rate is 3 per cent and there is no growth in wages. Suppose you are a high school senior and deciding whether or not to go to college. Find the PDV of earnings in the following cases. Also, assume that the work time is still 45 years, adding up to a 49-year non-college workcareer.
Label the following statements true or false and justify your answer.
Consider a fast-growing emerging market economy where output is growing is at 10% per year. The central bank would like to choose a growth rate of the money supply to keep inflation at 0%.
. = 0.04 + λ∆i
Problem9:Supposevelocityisconstant,thegrowthrateofrealGDPis3per cent per year, and the growth rate of money is 5 per cent per year. Calculate the long-run rate of inflation in the followingcases:
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