George ECON301 Macroeconomics - Consider an economy whose long-run

ECON 301 George Washington University Macroeconomics Questions

Question 1

Consider an economy whose long-run behavior is described by the Solow model.

A. Suppose that a change in the tax laws causes the economy’s saving rate (s) to permanently increase. Show graphically the steady state per-worker values of capital, investment and consumption both before and after the change in the saving rate. Briefly explain.

B. Suppose that instead of an increase in the saving rate, the economy experiences a permanent increase in the depreciation rate (d). Show graphically the steady state per-worker values of capital, investment and consumption both before and after the change in the depreciation rate. Briefly explain.

C. Suppose now that new computer technology makes business permanently more efficient. Show graphically the steady state per-worker values of capital, investment and consumption both before and after this change. Briefly explain.

D. Suppose that a storm destroys some of the economy’s capital stock, but leaving the saving rate, productivity level, depreciation rate and population growth rate unchanged. Show graphically the steady state per-worker values of capital, investment and consumption both before and after this change. Briefly explain.

Question 2

Suppose that the President proposes to lower the tax rate on interest income, claiming that, “If we encourage people to save, the economy will grow more quickly.” As a statement about the long-run behavior of the economy, would this claim be true in a world described by the Solow model? Could this claim be true in a world described by an endogenous growth model?