Using the Solow Model and Diagram




Solutions
Part A - Growth Rates & Time to Double (Rule of 70)
Part B - Returns to Scale - Constant or Not?
Part C - Solow Growth Model - Solving for Steady State
Part D - Plugging in Numbers
Part E - Using the Solow Model and Diagram


See page 105, figure 5.2 (of Jones Macro Econ Crisis Update Ed)
~You may be asked any change to .  So be ready to draw graphs and explain.
See pages 111-114 and pages 125-127 for this.



(e) The effect of a change in

The yellow line is output, production and income,  

The green line is investment,  

The blue line is depreciation,  

Where investment and depreciation intersection establishes


An increase in will shift up the investment line (green line, just like with the green line in figure 5.5). Clearly increasing the steady state level of capital (in fact, given what you know in problem D, if you increased to, say, will clearly have increased).

BUT ALSO! will increase the yellow output line too,  ( where increased from ), then;
    
        So you’d have a shift up in the Output: Y curve too.


How would wages evolve along the way? Two parts to this. With the increase in A, Y will jump up. So you’ll see a jump in income/wages immediately. But then with the increase in A, the investment rate is higher, the steady state capital level is higher. Thus you’ll also see after that jump, a slow asymptotic evolution toward the new
Thus it’ll look like the “Output Y” graph in figure 5.5, but with a jump up right at the 2010 too. (see graph).

Be ready to do both graphs exam-time.








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