2. Neoclassical Growth Model

Question 1

How much does each person decide to work?

Answer 1

They don’t decide, everyone works one unit of labour in each time period t

Question 2

How are firms illustrated in the model?

Answer 2

-Continuum of identical firms
-Firms have access to same technology that uses capital and labour as a single final good
-Perfectly competitive market

Question 3

Is the production function F(.) homogeneous?

Answer 3

Yes of degree one so has CRS

Question 4

What is the output per capita in efficiency units?

Answer 4

yt= Yt/AtLt

Question 5

What is the capital per capita in efficiency units?

Answer 5

kt=Kt/AtLt

Question 6

What can we say about the shape of the production function wrt capital?

Answer 6

Production is positive for any level of capital. Increasing capital increases production but does so at a decreasing rate. Concave shape

Question 7

Assumptions of feasibility condition

Answer 7

-Labour alt grows exogenously at rate n>=0
-the state of technology progresses at rate gamma >=0

Question 8

What is rho?

Answer 8

The subjective discount rate

Question 9

What is sigma?

Answer 9

The Constant Inter-temporal Elasticity of Substitution (CIES)

Question 10

What is the marginal utility of consumption like as t increases

Answer 10

Strictly positive but decreasing

Question 11

Second welfare theorem

Answer 11

Why efficient allocation can be achieved by a competitive equilibrium

Question 12

What does the Euler equation show?

Answer 12

The growth rate of consumption measured as consumption per efficiency units of labour

Question 13

in the limit, ie when time goes towards infinity what is the optimal value of capital according to the transversality condition?

Answer 13

Zero

Question 14

When do individuals postpone consumption?

Answer 14

When the market interest rate is greater than the subjective discount rate

Question 15

What does the amount which individuals postpone consumption depend on?

Answer 15

The intertemporal elasticity of substitution ó

Question 16

What is the definition for the balanced growth path?

Answer 16

An equilibrium such that for all t, change in capital and consumption in efficiency units is zero

Question 17

Rational expectations principle

Answer 17

Rational agents choose initial consumption on the stable path

Question 18

What is the balance growth path solution?

Answer 18

The unique stable saddle path converging to the balanced growth path

Question 19

When the economy is in a steady state is there growth?

Answer 19

Yes the economy grows at rate of technological progress (gamma) in per capita terms and grows at gamma plus population growth (n) for the whole economy

Question 20

Why do economies in transition to steady state grow quicker

Answer 20

They grow at exogenous rate of technological progress (gamma) but are also boosted by increase in capital accumulation as they move towards the steady state

Question 21

How can technological progress or total factor productivity be measured?

Answer 21

In logs as
change in TFPt= change in log(Yt) - alpha x log( kt) - (1- alpha) x log(Lt)