Shanghai University of Finance and

Economics
Department of Economics
Macroeconomic Theory

Instructor Min Zhang

Assignment 2
Due: April 19, 2010

Ch. 8 Economic Growth

Part one: Q3, Q4, Q6 in Ch. 8 in textbook (page 312)

Part two: Additional four questions:

1. Suppose that we modify the Solow model by allowing long-run techno-

logical progress. That is, suppose that z = 1 and there is labor-augmenting
technological progress with a production function

Y = F (K; bN ) ;

where b denotes the number of units of "human capital" per worker, assume
that
0
b = (1 + f ) b;
where f is the growth rate in human capital.
K
1. (a) Show that the long run equilibrium has the property that k = bN
is a constant. At what rate does aggregate output, aggregate
consumption, aggregate investment, and per-capita income grow
in this steady state? Explain your answer.

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 (b) What is the e¤ect of an increase in f on the growth in per-capita
income? Discuss how this model behaves relative to the standard
Solow model.

2. Alter the Solow growth model so that the production technology is

given by Y = zK; where Y is output, K is capital, and z is total factor
productivity. That is, output is produced only with capital.

1. (a) Show that it is possible for income per person to grow inde…nitely.
(b) Also show that an increase in the saving rate increases the growth
rate in per-capita income.
(c) From part (a) and (b), what the di¤erence between this model and
the basic Solow model? Explain these di¤erences and discuss.

3. In the model described in lecture (Growth and Development), consider

the e¤ect of an increase to the return to schooling. Particularly, suppose the
economy is initially on a balanced growth path and at time zero there is
a reform in the education sector. As a result of the reform, the return to
schooling parameter increases.

_ and the horizontal

1. (a) In a …gure where the vertical axis measures h=h,
axis measures the ratio Ah ; plot the following two lines

h A
= e ; and
h_ h

h
= g:
h_
Using the graph constructed above, show the short-run and the
long-run e¤ect of an increase in on the growth rate of h.
(b) Draw a graph representing how h=h_ evolves over time. In a sepa-
rate …gure, show how log(h) evolves over time.
(c) Discuss the consequence of the educational reform on the level of
technology used in this economy.

4. Is the convergence of GDP per worker predicted by the Solow model

consistent with the data observed in the reality? Explain.

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 Ch. 9. Monetary Intertemporal Model

Part one:. Q1, Q2, Q7 in textbook (page 366)

Part two:. Additional two questions

1. Suppose that the cost of accessing the banking system is D + H(X);

where D is a …xed cost, with D>0.

1. (a) How would you interpret D?

(b) How will this make a di¤erence for the consumer’s and …rm’s op-
timal choice of banking service?
(c) What e¤ect will this have on the demand for money?
(d) Determine the e¤ect of an increase in D on the demand for money
and on the equilibrium price level?

2. Suppose that the nominal interest rate is zero, that is R = 0:

1. (a) What will be the consumer’s and …rm’s optimal choice of banking
service?
(b) How much resources will be used up by the banking sector of the
economy?
(c) Explain your results in part (a) and (b). Discuss the realism of
these prediction.