Prof. Dr.

Marco Runkel

ALLGEMEINE VOLKSWIRTSCHAFTSLEHRE II

MAKROOKONOMIE
WS 2011/12

Exercise Sheet 6
The Solow Model
The submission of exercises denoted with * has to be done until
Monday, 28. November 2011, 12:00.
Later submission of the homework will not be evaluated!
Please submit it to the Secretary (Mrs. Kretzschmar, R. H 5139C)
or in the postbox H51 in the entrance of the main building.
Problem 1 : The Solow Model
Consider an economy, which follows the golden rule and is in its long run equilibrium. The
production function is given by:
Yt = Kt (At Nt )1 ,
where At is a productivity parameter, Nt denotes population, Kt the real capital stock and
Yt the real production in period t. The population growth rate equals 1%, the growth rate of
the real capital stock per capita 3% and of nominal production 6%. Additionally, the share of
wages is 1/2 and the depreciation rate equals 6%.
(a) Determine the relationship between the share of wages and the parameter in the production function.
(b) Determine the rate of technical progress, as well as the growth rates of real GDP, real
GDP per-capita and real GDP per efficiency labor unit. What is the inflation rate?
(c) Write down the production function in its intensity form.
(d) Determine the real capital stock and production per efficiency labor unit.
(e) Because of inflationary monetary policy, the inflation rate increases by 2 percentage
points. The savings rate, the depreciation rate, the rate of technical progress and the
population growth rate remain fixed. Explain whether (and if, by how much) the growth rates of real capital stock per-capita, nominal-and real GDP per efficiency labor unit
change.
1

Problem 2: The Solow Model II

Consider the following production function in intensity form (per efficiency labor unit):
y = f (k) = ln (1 + k)
(a) Determine the capital stock per efficiency labor unit k in a steady state along the golden
rule.
(b) How large is the optimal savings rate?
(c) Calculate (round up to the second decimal point) the optimal savings rate for = 0.15
and g = 0.03, when (i) n = 0.02 and (ii) n = 0.08.
(d) Explain briefly how your results in (c) would change, if the production function were of
the Cobb-Douglas type.
Problem 3: Stylized Facts
The economist Nicholas Kaldor established in 1961 the following stylized facts about economic
growth, which are still valid today:
(a) The labor productivity Y /N grows at a constant rate.
(b) The capital intensity K/N increases over time.
(c) The capital rent remains relatively constant.
(d) The capital coefficient K/Y is relatively constant.
(e) The shares of labor and capital income remain relatively constant.
Discuss these statements within the framework of the Solow model with technical progress. Is
the Solow model able to explain/reproduce these stylized facts?