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1. Following a secession referendum, the island nation of Iceland will break up into Norther Iceland and Southern Iceland. Northern Iceland will be home to 30% of the population of the entire island and it will keep 20% of the old nation’s capital stock. Assume that the economy of Iceland is well captured by the Solow model with a Cobb-Douglas production function. (a) Which of the two new countries will have a higher capital-per-worker ratio? How will they compare to the ratio of the old country? (b) Which of the two countries will have a higher output per worker? Again, also compare to the pre-secession output per worker. (c) Now rank the countries in terms of their wages. (d) Which country will have a greater labor share (the share of labor compensation in total income)?

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Samantha Balando
Samantha BalandoLv7
28 Sep 2019

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Related questions

Two countries, Highland and Lowland, are described by the Solow growth model. Both
countries are identical, except that the rate of labor-augmenting technological progress is
higher in Highland than in Lowland.
a. In which country is the steady-state growth rate of output per effective worker higher?
b. In which country is the steady-state growth rate of total output higher?
c. Does the Solow growth model predict that the two economies will converge to the same steady
state?

1. According to the Solow model, an increase in the capital-labor ratio will a. always increase steady state consumption per worker b. reduce steady state consumption per worker if the capital-labor ratio is below the Golden rule capital stock c. always reduce steady state consumption per worker d. increase steady state consumption per worker if the capital-labor ratio is below the Golden rule capital stock

2. In a steady state a. capital and labor, by definition, are inversely related to one another b. both consumption per worker and the capital-labor ratio are constant c. consumption per worker can change, but the capital-labor ratio is constant d. consumption per worker is constant, but the capital-labor ratio can change

3. Which of the following changes would lead, according to the Solow model, to a higher level of long-run output per worker? a. An increase in the saving rate b. A lower level of capital per worker c. A decrease in productivity d. A rise in the rate of population growth

4. In the long run, a reduction in productivity will cause a. an increase in the capital-labor ratio and a decrease in consumption per worker b. a decrease in the capital-labor ratio and a decrease in consumption per worker c. a decrease in the capital-labor ratio and an increase in consumption per worker d. an increase in the capital-labor ratio and an increase in consumption per worker

5. An increase in the growth rate of population in a steady-state economy would cause a. a pivot down and to the right in the investment line b. a parallel shift downward in the investment line c. a pivot up and to the left in the investment line d. a parallel shift upward in the investment line 1 2

6. In the efficiency wage model, an increase in productivity would a. have no effect on either output or the real wage b. increase output but have no effect on the real wage c. decrease the real wage but have no effect on output d. increase output but decrease the real wage

7. Keynesian economists believe that in the short run, a. money neutrality does not exist and prices adjust rapidly b. money neutrality does not exist and prices do not adjust rapidly c. money neutrality exists and prices adjust rapidly d. money neutrality exists and prices do not adjust rapidly

8. If the expected inflation rate is unchanged, a fall in the natural rate of unemployment would a. not shift the Phillips curve b. shift the Phillips curve to the left c. shift the Phillips curve to the right d. shift the Phillips curve to the left and shift the long-run Phillips curve to the right

9. Classical economists believe that in the short run, a. money neutrality does not exist and prices adjust rapidly b. money neutrality does not exist and prices do not adjust rapidly c. money neutrality exists and prices do not adjust rapidly d. money neutrality exists and prices adjust rapidly

10. The fact that the long-run Phillips curve is vertical implies that a. money can’t affect inflation in the long run b. money is neutral in the long run c. monetary policy can’t affect unemployment d. there is a natural rate of inflation

1. Briefly explain the shape of the per-worker production curve in the Solow model. If investment per worker initially exceeds saving per worker, how is the steady state capital-labor ratio achieved?

2. Describe the effects of a rise in the domestic real interest rate on the exchange rate and on both domestic and foreign net exports.

3. For each of the following changes, what happens to the real interest rate and output in the short run, before the price level has adjusted to restore general equilibrium? a. Wealth declines b. Money supply declines c. The future marginal productivity of capital declines d. Expected inflation rises e. Future income rises

1. What does the term s*Y represent in the capital-accumulation equation of Solow growth model?

a) The labor-income share of GDP.

b) Net investment.

c) Gross investment.

d) The net change in the capital stock from one year to the other.

2. In the Solow growth model, suppose that the savings rate is 25%, the depreciation rate is 10%, the current capital stock is 10 trillion $ and current output of a country is 4 trillion $. What will the capital stock of this country be in the following period?

a) 10 trillion $.

b) 11 trillion $.

c) We cannot tell since we are not given information about technological progress.

d) We cannot tell since population growth is not known.

3. Consider a country which starts with a capital stock below its steady-state level in the Solow model (without technological change). Why is growth slowing down over time for this country?

a) Population growth is becoming stronger over time since the population is growing, which makes it harder to accumulate high levels of capital per capita.

b) A country cannot maintain the same savings rate forever, so investment must decrease at some point.

c) The more capital there is, the more of it depreciates. As the country becomes richer, it becomes ever harder to replace depreciated capital.

d) There are diminishing returns to the factor capital. Thus investment, capital and GDP per capita grow by ever smaller amounts as the country becomes richer.

4. Suppose Pakistan has a higher savings rate than Iran. Both start out with the same capital per worker. All other parameters are the same for both countries (population growth and depreciation rate). The Solow growth model (without technological change) predicts that...

a)

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