By NEAS - 8/15/2018 4:13:35 PM
Macro Module 4 Solow growth model savings rate practice exam questions
Countries ABC and XYZ follow the simple Solow growth model, with no changes in the technology level.
● The savings rate is 31% greater in country ABC than in country XYZ.
● The depreciation rate is 5.34% and the population growth rate is 2.80% in both countries.
● In 20XX, capital per worker is 836 and real GDP per worker is 266 in both countries.
● The growth rate of capital per worker in country XYZ is 1.35% per annum.
Question 4.1: Ratio of income to capital
What is the ratio of income to capital in 20XX for these two countries?
Answer 4.1: 266 / 836 = 31.82%
Question 4.2: Savings rate
What is the savings rate in country XYZ?
Answer 4.2: (2.80% + 1.35%) / (31.82% – 5.34%) = 15.67%
growth rate of capital per worker = savings rate × (ratio of income to capital – depreciation rate) – population growth rate ➾
savings rate = (population growth rate + growth rate of capital per worker) / (ratio of income to capital – depreciation rate)
Question 4.3: Savings rate
What is the savings rate in country ABC?
Answer 4.3: 15.67% × (1 + 31%) = 20.53%
(savings rate is 31% higher in ABC than in XYZ)
Question 4.4: Growth rate of capital per worker
What is the growth rate of capital per worker in country ABC?
Answer 4.4: 20.53% × (31.82% – 5.34%) – 2.80% = 2.64%
(growth rate of capital per worker = savings rate × (ratio of income to capital – depreciation rate) – population growth rate)
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