ECON2102 – Macroeconomics 2
Additional Tutorial Questions
Tutorial 2
Question 1 – Consider the Solow Swan Model whereby the economy is initially on its steady state. Suppose there is a permanent increase in s arising from the government increasing public savings.
a) What is the effect of the increase in s on the steady state level of capital per worker? Illustrate using a diagram.
b) Describe the likely effect(s) of a permanent increase in s on output per worker and capital per unit of labor.
c) Draw graphs illustrating how the following change:
- National savings rate
- Growth rate of output per worker
- Growth Rate of capital per worker
- Capital per worker.
You should draw these graphs as a function of time. Show how each variable was tracking before the permanent change and then after the permanent change. What is the difference between the savings rate effect compared with the effect of the remaining three parameters?
d) What is likely to happen to consumption expenditure immediately after the rising savings rate? Will consumption expenditure over the long-run period exceed its level prior to the increase in s?
Question 2 – Consider the basic Solow Swan Model. Suppose we have a Cobb-Douglas production function expressed as:
f(k) = kα
and s > n + g + δ. Describe in words, the likely effect of a rise in capital’s share of national income from α0 to α1. Draw a diagram to illustrate the effects on the steady state level of capital.
Question 3 – Consider the Solow Swan model. Describe in words, the likely effect of a rise in worker effort or intensity. Draw a diagram to illustrate the effects on the steady state level of capital.