Macroeconomics: Policy and Applications

ECON2234 (Term 2, 2014)

Assignment Six
(Due: 12 noon, 26 September, 2014)

* Please fill in assignment cover sheet and attach it to your assignment answers. You can
download the relevant assignment cover sheet from the Business School Current Students
web page http://www.business.uwa.edu.au/students/assessments. You must state your tutorial
group (time and day) and the name of your tutor on the cover sheet. Otherwise, your
assignment will not be assessed and will receive a mark of zero.

1. Assume the aggregate production function is of the following form: Y = aK. At what
capitallabour ratio (k) can a steady-state equilibrium be reached? [3 marks]

2. Suppose you add a variable rate of population growth to a two-sector model of growth.
(Hint: Combine Figures 7.2 and 7.3)
a. What do the production function, investment requirement line and savings line look
like? [4 marks]
b. Characterize the set of equilibria for this model. Does output in any of the equilibria
have non-zero per capita growth? [4 marks]
c. Does the addition of the variable rate of population growth to this model help you to
explain anything that a simpler two-sector model with a fixed rate of growth, or a
one-sector model with variable population growth, cannot? [2 marks]

3. Consider an economy whose production function is: = K
0
(AN)
1-0
with A = 4K N .
Suppose that it has a savings rate of 0.1, a population growth rate of 0.02, an average
depreciation rate of 0.03 and that = 0.5.
a. Reduce the production function to the form y = ok. What is a? [2 marks]
b. What are the growth rates of output and capital in this model? [4 marks]
c. Interpret a. What are we really saying when we assume that the labour-augmenting
technology, A, is proportional to the level of capital per worker? [2 marks]
d. What makes this an endogenous growth model? [2 marks]

4. Consider an economy in which production is characterized by the neoclassical function:
5 . 0 5 . 0
N K Y . Suppose, again, that it has a savings rate of 0.1, a population growth rate of
0.02 and an average depreciation rate of 0.03.
a. Write this production function in per worker form, and find the steady-state values
of capital per worker, k, and income per worker, y. [2 marks]
b. At the steady-state value of k, is there more or less capital than at the golden-rule
level? [4 marks]
c. Determine what savings rate would yield the golden-rule level of capital in this
model. [2 marks]
d. In the context of this neoclassical growth model, can a country have too much
saving? [2 marks]

~ End ~