Chapter 11

1. Explain why the condition sf(K_{t}/N) = δK_{t}/N keeps capital per person constant over time.

2. Show the steady state for K/N and Y/N graphically, and explain why the steady state is an equilibrium (i.e. what happens if the economy is not at the steady state).

3. Show graphically how the steady state standard of living changes if there is an increase in the saving rate, s. Does an increase in s cause output growth to increase permanently? Explain.

4. Show graphically how the steady state standard of living changes if there is an increase in the depreciation rate, δ.

5. What is the golden rule? Explain graphically (be sure to explain why we know the graph hits zero when s=0 and when s=1). Are most economies at the golden rule? Why or why not?

6. How do we add human capital to the model? How does the addition of human capital change the results of the model? Which is the more important determinant of the standard of living, human or physical capital?

Chapter 12

7. What is technological progress, and how can we incorporate it into our model? What is effective labor? Beginning with the restricted form of the production function, Y=F(K,AN), show that, for constant returns to scale, Y/AN = f(K/AN). Show this production graphically and explain how the graph illustrates diminishing returns.

8. When there is technological progress and population growth, explain why the condition sf(K/AN) = (δ + g_{A} + g_{N})(K/AN) keeps capital per effective worker constant.

9. Show the steady state for K/AN and Y/AN graphically, and explain why the steady state is an equilibrium (i.e. what happens if the economy is not at the steady state).

10. Show graphically how the steady state standard of living changes if there is an increase in the saving rate, s. Does an increase in s cause output growth to increase permanently? Explain.

11. What determines the growth rate of output per person, Y/N? Explain.

12. What are the determinants of technological progress? Is it true, according to the data, that Y/N grows at rate g_{A} in developed countries? Does the same result hold for developing countries?

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