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Economia V; Instructor: Marco Del Negro
Problem set 10
Consider the Solow growth model with population growth but no technological
progress studied in class. To
refresh your memory, the evolution of the capital to labor ratio ki,t according to
this model studied is:
where s is the savings rate,
is depreciation, and
is the rate at which
population grows.
Some economists believe that as the baby-boomers start to retire, the sum of private and
government savings will decline in the US from 16% of GDP to about 13% of GDP. Assume
that everything else remains unchanged.
Answer the following questions:
a) What will the effect of this reduction in saving be on the steady state
growth rate of total output, of capital, and of productivity? Explain briefly.
b) What will the effect of this reduction in saving be on the steady state levels
of the capital-to-labor ratio, output-per-worker, and per-capita consumption? Explain
briefly.
c) Describe graphically the evolution of the capital-to-labor ratio from the old steady state
to the new steady state.
Marco Del Negro
2000-04-04