# 1 Problem Set 2 MSU EC 410 Prof. Ahlin due 2 / 1 9 / 1 5 1 . Consider a country in which Y = 200 K

Feb 3rd, 2012
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1 Problem Set 2 MSU EC 410 Prof. Ahlin due 2 / 1 9 / 1 5 1 . Consider a country in which Y = 200 K 2/5 N 3/5 . Assume in this country they save 20% of their income, population grows at 3% per year, and depreciation of capital occurs at 10% per year. Use the Solow model. a. Compare the effectiveness of i) a 50% increase in the savings rate (to 30%), ii) a 67% decline in the population growth rate (to 1%), and iii) a 10% increase in productivity (to 220). That is, for each, give the percent by which it increases lon g - run average income ( y * ) and long - run average consumption ( c * ). b. Give one policy each that could be undertaken to accomplish i) - iii). W hich policy has the greatest impact on long - run well - being (assuming each policy has zero costs) ? 2 . Imagine the fol lowing goal of Lenin/Stalin at the beginning of the Soviet regime in Russia: to overtake (i.e. equal) and surpass the world’s industrialized economies in terms of GDP per capita. To achieve this

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1Problem Set 2MSU EC 410Prof. Ahlindue 2/19/151.Consider a country in which Y = 200 K2/5N3/5. Assume in this country they save 20% of their income, population grows at 3% per year, and depreciation of capital occurs at 10% per year. Use the Solow model.a.Compare the effectiveness of i) a 50% increase in the savings rate (to 30%), ii) a 67% decline in the population growth rate (to 1%), and iii) a 10% increase in productivity (to 220). That is, for each, give the percent by which it increases long-run average income (y*)and long-run average consumption (c*).b.Give one policy each that could be undertaken to accomplish i)-iii). Whichpolicy has the greatest impacton long-run well-being(assuming each policy has zero costs)?2.Imagine the following goal of Lenin/Stalin at the beginning of the Soviet regime in Russia: to overtake (i.e. equal) and surpass the world's industrialized economies in terms of GDP per capita. To achieve this goal, the main instrument of control is the fraction of national production that is devoted to building the nation's productive capacity: new machines, factories, transportation equipment, and roads (i.e. investment as a share of GDP). The rest of national production is used for consumer items like clothing and food. The country begins with relatively little capital, being mostly rural and non-industrialized. Assume each of the following:?GDP per capita starts in Russia at \$300/yea

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