Long Run Growth
Problem Set #8
Economics 100b; Spring 1996; Brad DeLong
1. What does it mean for an economy to have constant returns to
2. How can you tell whether or not an economy in steady-state growth
is at the "Golden Rule" level of saving and the capital stock?
3. Why might you think that the "Golden Rule" level of saving and the
capital stock is a good place for an economy to be?
4. What do you think were the principal causes of the productivity
slowdown of the 1970s?
5. Suppose that an economy's production function is Y =
K0.5(EL)0.5 ; suppose further that the savings
rate is 40% of GDP, that the depreciation rate d is 4% per year, the
population growth rate n is 0% per year, and the rate of growth g of
the efficiency of the labor force is 2% per year. What is the
steady-state capital-output ratio? What are the steady-state levels
k* of the capital stock per unit of labor power (or per efficiency
unit of labor) and y* of output per unit of labor power?
6. Suppose that all variables are the same as in problem 5 save the
production function, which instead is:
K0.8(EL)0.2 ; how would your answers be
different? Can you briefly explain why your answers are
7. Japan has had a very high savings rate and a high growth rate of
output per worker over the past half century, starting from an
initial post-WWII very low level of capital per worker. What does the
analysis of chapter 4 suggest about Japan's ability to sustain a
higher growth rate than other industrial countries?
8. For what reasons might it make sense for the government to adopt a
"technology policy", and subsidize investment in certain areas?