Chapter 9

Question 1

Solow growth model

Answer 1

A model that shows how saving, population growth, and technological progress determine the level of and growth in the standard of living

Question 2

Steady state

Answer 2

A condition in which key variables are not changing

Question 3

What does the steady state represent?

Answer 3

The long-run equilibrium of the economy

Question 4

What does the saving rate say about the capital stock in the Solow growth model?

Answer 4

If the saving rate is high, the economy will have a large capital stock and a high level of output in the steady state. If the saving rate is low, the economy will have a small capital stock and low level of output in the steady state

Question 5

Golden rule level of capital

Answer 5

The saving rate in the Solow growth model that leads to the steady state in which consumption per worker (or consumption per effective unit of labor) is maximized

Question 6

How do the different starting points affect what achieving the Golden Rule does to the economy?

Answer 6

When the economy begins above the Golden Rule level, reaching it produces higher consumption at all points in time. When the economy begins below the Golden Rule level, reaching it requires initially reducing consumption to increase consumption in the future