Intermediate Macroeconomies - Exam 2 Study Guide

03/30/26

Why does growth matter?

improves living conditions, reduces poverty, affecting millions of people

What is y

Y/L (output per worker)

What is k

K/L (capital per worker)

What is the per-worker function

y = k^α

What causes the capital stock to rise?

Investment

What causes the capital stock to fall?

Depreciation

In the Solow growth mode, if investment exceeds depreciation, the capital stock will ___, and output will ___ until the steady state is attained.

increase; increase

When does the steady state occur?

capital per worker (k) is constant

What determines how much output the economy produces?

production function

What determines the allocation of output between consumption and investment?

saving rate

What does a higher saving rate lead to?

larger capital stock; higher level of output

If the saving rate increases, capital per worker will:

increase until the new steady state is reached

How to find the steady-state capital per worker (k*)?

investment = depreciation

sf(k) = depreciation × k*

How to find steady-state output per worker (y*)?

plug in k* into the production function

How to get the steady-state consumption per worker (c*)

(1-s)y*

How to find golden rule steady-state (k*gold)

MPK (production function) = depreciation rate

How to calculate MPK

derivative of production function

How to find the golden rule saving rate

α

How does population growth affect k*?

decreases it

What is savings

sf(k)

With population growth and labor-augmenting tech, what is the maximization of consumption per effective worker?

MPK = depreciation + population growth + tech

According to the Solow model, persistently rising living standards can only be explained by:

technological progress

In the Solow model with population growth and technological progress, the steady-state growth rate of output per effective worker is

0

In the Solow model with population growth and technological progress, the steady-state growth rate of output per effective worker is:

g (tech progress)

When is the Steady-State Condition

Δk=0