Economic Growth, year 2017-18

Midterm exam

Name: Exam A
Group:

Instructions

• This booklet cannot be unstapled. Incomplete booklets will be not graded.

• You have 1h and 15 minutes to answer this exam.

• Remember to write your name and your group number in the space provided.
• Scholastic dishonesty will not be allowed.

– There are 22 multiple choice questions and two exercises.

– Every correct answer in the multiple choice part adds 3 points and each incorrect answer
adds negative, -1 points. Unanswered questions are not counted.
– Mark the correct answer of the multiple choice part in the box below.
– You can use the back of the sheets of this booklet for your calculations.

Answers to multiple choice questions

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a a a a a a a a a a a a a a a a a a a a
b b b b b b b b b b b b b b b b b b b b
c c c c c c c c c c c c c c c c c c c c
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
a a a a a a a a a a a a a a a a a a a a
b b b b b b b b b b b b b b b b b b b b
c c c c c c c c c c c c c c c c c c c c

1
Multiple choice questions (60 points)
α 1−α
1. In Minas Tirith, aggregate production can be represented as Y1t = K1t H1t . The saving rate is
s ∈ (0, 1), capital depreciates at the rate δ ∈ (0, 1) and the level of human capital is H1t = eψ1 u1 L1t .
The labor force, Lt grows at the rate n ∈ (0, 1). The government of Minas Tirith is worried because their
level of income per worker is lower than that of Gaula. That is, Y1t /L1t = 0.5 (Y2t /L2t ). Nevertheless,
the capital to output ratio, Kt /Yt , is the same in both countries. So are the saving rate, depreciation
of capital and the population growth rate. Both countries are at their steady state. So the difference
must be due to
(a) The investment rate.
(b) Minas Tirith grows at a rate lower than that of Gaula.
(c) The schooling technology, ψ, is better in Gaula than in Minas Tirith.
2. According to Kaldor,
(a) The share of labor, wt Lt /Yt , is constant over time.
(b) The real wage, wt , is constant over time.
(c) Output per worker, Yt /Lt, is constant over time.
R At α
3. In Rohan, production per worker can be represented as yt = `1−α Yt 0
xjt d j, the level of innovation,
η
At , is given by Ȧt = φ Aγt (`At Lt ) . The production of the intermediate goods xjt needs of capital,
xjt ≤ kjt , and paying the price of the patent of the idea, Qt . The patent has no time limit. Population
Lt grows at a constant rate n. `Y t + `At = 1. Assume that the economy is at its balanced growth path.
A new government reduces the life of the patent from infinity to 20 years, time after which anyone can
use the design. Then, in the long run,
(a) The level of innovation stays constant.
(b) The level of innovation increases.
(c) The level of innovation decreases.
4. According to Kaldor,
(a) Capital per worker, Kt /Lt is constant over time.
(b) The share of capital, (rt + δ) Kt /Lt , is constant over time.
(c) The capital to output ratio is growing over time.
5. In Nemedia aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. At time t = 0
the stock of capital per worker is k0 = 1. In Pictos, the saving rate is s = 0.3. Both economies are at
their steady state. Suppose now that both economies open their capital markets, so that capital can
flow from one country to another one. Then,
(a) The return to capital is the same in both countries and, therefore, it does not move.
(b) Capital flows from Pictos to Nemedia.
(c) Capital flows from Nemedia to Pictos.
6. In Benejuzar the stock of capital per worker is twice the level in Bigastro. Nevertheless, the return to
capital is the same in both countries. This is because
(a) The level of productivity in Bigastro is the same that in Benejuzar.
(b) The level of productivity in Bigastro is twice that of Benejuzar.
(c) The level of productivity in Bigastro is half that of Benejuzar.

2
 7. Consider two economies, Macondo and Metropolis. In both countries the technology to produce fi-
nal good is Yt = Kt0.5 L0.5
t and both economies start out with the same level of capital per worker.
In Macondo output per worker is increasing whereas in Metropolis output per worker is decreasing.
Thus,
(a) Both economies have the same investment rate.
(b) The investment rate of Metropolis is higher than that of Macondo.
(c) The investment rate of Metropolis is lower than that of Macondo.
8. In Gotham, aggregate production can be represented as Yt = Kt0.5 (At Lt )0.5 . The growth rate of output
is 3%, the growth rate of capital is 4% and the growth rate of hours worked is 1%. This, the growth
rate of the factor At is
(a) 0%.
(b) 1%.
(c) 2%.
9. According to Kaldor,
(a) The capital-output ratio, Kt /Yt , has no trend over time.
(b) The capital-output ratio, Kt /Yt , is increasing over time.
(c) The capital-labor ratio, Kt /Lt , is constant over time.
0.5
10. In Avra, aggregate production can be represented as Yt = Kt0.5 (Lt ) . The saving rate is s = 0.6,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Avra, at time
t = 0, is at its steady state. The saving rate of the economy falls to s = 0.5. The effect is
(a) Capital and consumption per worker fall.
(b) Capital and income per worker falls.
(c) Consumption decreases.
(d) Income and consumption per worker fall.
11. In Micomicón and Barataria the technology is Yt = Kt0.5 L0.5
t . Income per worker in Micomicón is twice
the level of income per worker in Barataria. In spite of that, the capital to income ratio, Kt /Yt , is the
same in both countries. Then,
(a) Capital per worker in Micomicón is four times the level of capital per worker in Barataria.
(b) Capital per worker in Micomicón is half the level of capital per worker in Barataria.
(c) Capital per worker in Micomicón is equal to the level of capital per worker in Barataria.
12. In Gotham, aggregate production can be represented as Yt = Ktα (At ` Nt )1−α . The saving rate is
· ·

s ∈ (0, 1), N At gt
Nt = n and At = A e . ` represents hours worked per capita. Thus, total hours worked
t

are ` Nt . At the balanced growth path

(a) Output and capital per capita are constant.
(b) Output and capital per capita grow at the rate g + n.
(c) Output and capital per capita grow at the rate g.
13. Which of these production functions can represent Gross Domestic Product taking into account the
Kaldor facts and that the capital-labor ratio, Kt /Lt , is increasing over time?
(a) Yt = Kt0.25 L0.75
t + 3 Kt .
 2
0.5
(b) Yt = 0.3 Kt0.5 + 0.7 (At Lt ) , At = e0.01 t .
(c) Yt = At Kt0.25 L0.65
t .

3
 0.5
14. In Kyrkania, aggregate production can be represented as Yt = Kt0.5 (At Lt ) . The saving rate is
s = 0.2, capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01.
The level of productivity is At = A0 e0.03 t . Kyrkania, at time t = 0, is at its balanced growth path. The
government rises taxes at time t = 1. The effect of such policy is
(a) A permanent reduction in the level of income per worker, a transitory effect on the growth rate
of income per worker.
(b) A permanent reduction in the level of income per worker and the growth rate of income per
worker.
(c) A transitory reduction in the level of income per worker and the growth rate of income per
worker.
(d) A transitory reduction in the level of income per worker, a permanent effect on the growth rate
of income per worker.
15. Shem is an economy where productivity does not grow over time. A policy that reduces the population
growth rate will produce:
(a) A permanent increase in the growth rate of output per capita.
(b) A permanent increase in the level of consumption per capita.
(c) A reduction in the steady state level of investment in per capita terms.
16. In Avra, aggregate production can be represented as Yt = Ktα (At ` Nt )1−α . The saving rate is s ∈
(0, 1), Ṅ Ȧt
Nt = n and At = g. Thus, total hours worked are ` Nt . An epidemic desease has halved
t

population at time t0 so that Nt0 = 0.5 Nt0 − . Per capita hours worked remain to be `. The economy
was at its balanced growth path. Right after the desease,
(a) Capital and income per capita are not affected.
(b) Capital per capita rises and falls again to its balanced growth path level.
(c) Production per capital falls and rises again to its balanced growth path level.
17. In Vetusta aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. At time t = 0
the stock of capital per worker is k0 = 1. Then, over time
(a) The return to capital grows over time.
(b) Capital, output, consumption (per worker) and the wage decrease over time. The real return
of capital increases over time.
(c) Capital, output, consumption (per worker) and the wage grow over time. The real return of
capital decreases over time.
1−α
18. In Cimmeria, production per worker can be represented as yt = ktα (At `Y ) , the level of innovation,
η
At , is given by Ȧt = φ A1−η
t (`A Lt ) . Population Lt grows at a constant rate n0 . `Y + `A = 1. Assume
that the economy is at its balanced growth path. The government has implemented a subsidy to parents
per child born As a result, the population growth rate has increased, n1 > n0 . The effect is
(a) A transitory effect in the income growth rate and a permanent increase in its level.
(b) A permanent effect in the income growth rate and a transitory increase in its level.
(c) A permanent effect in the growth rate and the level of income.

4
 0.5
19. In Averno, aggregate production can be represented as Yt = Kt0.5 (At Lt ) . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. The level
of productivity is At = A0 e0.03 t . Averno, at time t = 0, is at its balanced growth path. An earthquake
destroys half of the stock of capital of the economy at t = 1. The effect of the earthquake is
(a) A permanent reduction in the stock of capital per worker.
(b) The growth rate of income per worker increases permanently.
(c) The growth rate of income increases and starts falling until the economy moves back to its
balanced growth path.
(d) The growth rate of income falls permanently.
20. Consider two economies, Macondo and Metropolis. In both the technology to produce final good is
0.5
Yt = Kt0.5 (At Lt ) , where s = 0.2 and δ + n = 0.09. The productivity factor is At = e0.01 t . At time
t = 0 the stock of capital per worker in Macondo half of the stock of capital per worker in Metropolis.
(a) The growth rate of output per worker is higher in Macondo than in Metropolis.
(b) The growth rate of output per worker is higher in Metropolis than in Macondo.
(c) The level of income per worker in Macondo is half of the level of income per worker in Metropo-
lis at time t = 0.
21. In Kyrkania, aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Kyrkania, at
time t = 0, is at its steady state. The saving rate is reduced to s = 0.1. Then
(a) output per worker falls in 15%.
(b) output per worker falls in 50%.
(c) output per worker does not change.
22. In Narnia, aggregate production can be represented as Yt = Kt0.5 Lt0.5 . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Narnia, at
time t = 0, is at its steady state. The government liberalizes markets so that the saving rate increases
to s = 0.4. Then:
(a) Consumption falls and increases until it reaches a new higher steady state level.
(b) Consumption increases permanently.
(c) Consumption decreases permanently.
(d) The return to capital increases.

5
Exercises
23. The effects of immigration (17 points). In Micomicón aggregate production needs of capital and labor
0.5
according to the production function, Yt = Kt0.5 (A Lt ) , where A = 100 e0.01 t . Capital depreciates at
Ṅt
the rate δ = 0.09 and the population growth rate is Nt = n = 0.01. The investment rate is s = 0.2. In
this economy the labor force is Lt = 0.6 Nt .

(a) (6 points) Obtain the level of capital, consumption and income at the steady state in per capita
terms.
(b) (6 points) Assume that there has been a big inflow of immigrants to Micomicón at time t = 1.
Right before the arrival of immigrants, the size of the population was N1 = 100. The inflow of
immigrants amounts to ∆N = 20. After the arrival of immigrants, the size of the workforce is
Lt = 0.7 Nt . Find the new steady state for this economy. That is, find the level of capital, income
and consumption in per capita terms for the new steady state.
(c) (5 points) Show graphically the transition of consumption per capita towards the new steady state
since the moment of the arrival of immigrants.

6
24. Taxes and the Golden Rule (17 points). In Gotham the final good is produced with capital and labor,
0.5
Yt = Kt0.5 (At Lt ) . Population, Nt = e0.01 t , grows at a constant rate n and the depreciation rate of
capital is δ = 0.08. Hours worked Lt are a constant fraction of population, Lt /Nt = 1. Suppose that the
saving rate is s = 0.20, n = 0.01, At = 100 e0.01 t . Suppose further that families value equally private
consumption c and consumption of a public good g: they obtain utility from the total consumption, ct +gt .
Right now the Conservative party is in power. Taxes are zero and there is no public expenditure. The
economy was at a balanced growth path. At time t = t0 the Socialist Party won the election and raised
a tax rate on income equal to τ = 1/3. The tax revenues are used to finance public expenditures,
Nt gt = τ Yt . The socialist government keeps a balanced government budget.
(a) (10 points) Obtain the new balanced growth path. Do you think that voters should be happy with
this policy?
(b) (7 points) Obtain the transition path for income and consumption (in per capital levels) from the
original balanced growth path to the new balanced growth path.

7
 Economic Growth, year 2017-18
Midterm exam answer key

Nombre: Versión A
Grupo:

Multiple choice questions (60 points)

α 1−α
1. In Minas Tirith, aggregate production can be represented as Y1t = K1t H1t . The saving rate is
s ∈ (0, 1), capital depreciates at the rate δ ∈ (0, 1) and the level of human capital is H1t = eψ1 u1 L1t .
The labor force, Lt grows at the rate n ∈ (0, 1). The government of Minas Tirith is worried because their
level of income per worker is lower than that of Gaula. That is, Y1t /L1t = 0.5 (Y2t /L2t ). Nevertheless,
the capital to output ratio, Kt /Yt , is the same in both countries. So are the saving rate, depreciation
of capital and the population growth rate. Both countries are at their steady state. So the difference
must be due to
(a) The investment rate.
(b) Minas Tirith grows at a rate lower than that of Gaula.
(c) The schooling technology, ψ, is better in Gaula than in Minas Tirith.
2. According to Kaldor,
(a) The share of labor, wt Lt /Yt , is constant over time.
(b) The real wage, wt , is constant over time.
(c) Output per worker, Yt /Lt, is constant over time.
R At α
3. In Rohan, production per worker can be represented as yt = `1−α Yt 0
xjt d j, the level of innovation,
γ η
At , is given by Ȧt = φ At (`At Lt ) . The production of the intermediate goods xjt needs of capital,
xjt ≤ kjt , and paying the price of the patent of the idea, Qt . The patent has no time limit. Population
Lt grows at a constant rate n. `Y t + `At = 1. Assume that the economy is at its balanced growth path.
A new government reduces the life of the patent from infinity to 20 years, time after which anyone can
use the design. Then, in the long run,
(a) The level of innovation stays constant.
(b) The level of innovation increases.
(c) The level of innovation decreases.
4. According to Kaldor,
(a) Capital per worker, Kt /Lt is constant over time.
(b) The share of capital, (rt + δ) Kt /Lt , is constant over time.
(c) The capital to output ratio is growing over time.

1
 5. In Nemedia aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. At time t = 0
the stock of capital per worker is k0 = 1. In Pictos, the saving rate is s = 0.3. Both economies are at
their steady state. Suppose now that both economies open their capital markets, so that capital can
flow from one country to another one. Then,
(a) The return to capital is the same in both countries and, therefore, it does not move.
(b) Capital flows from Pictos to Nemedia.
(c) Capital flows from Nemedia to Pictos.
6. In Benejuzar the stock of capital per worker is twice the level in Bigastro. Nevertheless, the return to
capital is the same in both countries. This is because
(a) The level of productivity in Bigastro is the same that in Benejuzar.
(b) The level of productivity in Bigastro is twice that of Benejuzar.
(c) The level of productivity in Bigastro is half that of Benejuzar.
7. Consider two economies, Macondo and Metropolis. In both countries the technology to produce fi-
nal good is Yt = Kt0.5 L0.5
t and both economies start out with the same level of capital per worker.
In Macondo output per worker is increasing whereas in Metropolis output per worker is decreasing.
Thus,
(a) Both economies have the same investment rate.
(b) The investment rate of Metropolis is higher than that of Macondo.
(c) The investment rate of Metropolis is lower than that of Macondo.
8. In Gotham, aggregate production can be represented as Yt = Kt0.5 (At Lt )0.5 . The growth rate of output
is 3%, the growth rate of capital is 4% and the growth rate of hours worked is 1%. This, the growth
rate of the factor At is
(a) 0%.
(b) 1%.
(c) 2%.
9. According to Kaldor,
(a) The capital-output ratio, Kt /Yt , has no trend over time.
(b) The capital-output ratio, Kt /Yt , is increasing over time.
(c) The capital-labor ratio, Kt /Lt , is constant over time.
0.5
10. In Avra, aggregate production can be represented as Yt = Kt0.5 (Lt ) . The saving rate is s = 0.6,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Avra, at time
t = 0, is at its steady state. The saving rate of the economy falls to s = 0.5. The effect is
(a) Capital and consumption per worker fall.
(b) Capital and income per worker falls.
(c) Consumption decreases.
(d) Income and consumption per worker fall.
11. In Micomicón and Barataria the technology is Yt = Kt0.5 Lt0.5 . Income per worker in Micomicón is twice
the level of income per worker in Barataria. In spite of that, the capital to income ratio, Kt /Yt , is the
same in both countries. Then,
(a) Capital per worker in Micomicón is four times the level of capital per worker in Barataria.
(b) Capital per worker in Micomicón is half the level of capital per worker in Barataria.
(c) Capital per worker in Micomicón is equal to the level of capital per worker in Barataria.

2
12. In Gotham, aggregate production can be represented as Yt = Ktα (At ` Nt )1−α . The saving rate is
· ·

s ∈ (0, 1), N At gt
Nt = n and At = A e . ` represents hours worked per capita. Thus, total hours worked
t

are ` Nt . At the balanced growth path

(a) Output and capital per capita are constant.
(b) Output and capital per capita grow at the rate g + n.
(c) Output and capital per capita grow at the rate g.
13. Which of these production functions can represent Gross Domestic Product taking into account the
Kaldor facts and that the capital-labor ratio, Kt /Lt , is increasing over time?
(a) Yt = Kt0.25 L0.75
t + 3 Kt .
 2
0.5 0.5
(b) Yt = 0.3 Kt + 0.7 (At Lt ) , At = e0.01 t .
(c) Yt = At Kt0.25 L0.65
t .
0.5
14. In Kyrkania, aggregate production can be represented as Yt = Kt0.5 (At Lt ) . The saving rate is
s = 0.2, capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01.
The level of productivity is At = A0 e0.03 t . Kyrkania, at time t = 0, is at its balanced growth path. The
government rises taxes at time t = 1. The effect of such policy is
(a) A permanent reduction in the level of income per worker, a transitory effect on the growth rate
of income per worker.
(b) A permanent reduction in the level of income per worker and the growth rate of income per
worker.
(c) A transitory reduction in the level of income per worker and the growth rate of income per
worker.
(d) A transitory reduction in the level of income per worker, a permanent effect on the growth rate
of income per worker.
15. Shem is an economy where productivity does not grow over time. A policy that reduces the population
growth rate will produce:
(a) A permanent increase in the growth rate of output per capita.
(b) A permanent increase in the level of consumption per capita.
(c) A reduction in the steady state level of investment in per capita terms.
16. In Avra, aggregate production can be represented as Yt = Ktα (At ` Nt )1−α . The saving rate is s ∈
(0, 1), Ṅ Ȧt
Nt = n and At = g. Thus, total hours worked are ` Nt . An epidemic desease has halved
t

population at time t0 so that Nt0 = 0.5 Nt0 − . Per capita hours worked remain to be `. The economy
was at its balanced growth path. Right after the desease,
(a) Capital and income per capita are not affected.
(b) Capital per capita rises and falls again to its balanced growth path level.
(c) Production per capital falls and rises again to its balanced growth path level.
17. In Vetusta aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. At time t = 0
the stock of capital per worker is k0 = 1. Then, over time
(a) The return to capital grows over time.
(b) Capital, output, consumption (per worker) and the wage decrease over time. The real return
of capital increases over time.
(c) Capital, output, consumption (per worker) and the wage grow over time. The real return of
capital decreases over time.

3
 1−α
18. In Cimmeria, production per worker can be represented as yt = ktα (At `Y ) , the level of innovation,
η
At , is given by Ȧt = φ A1−η
t (`A L t ) . Population Lt grows at a constant rate n 0 . `Y + `A = 1. Assume
that the economy is at its balanced growth path. The government has implemented a subsidy to parents
per child born As a result, the population growth rate has increased, n1 > n0 . The effect is
(a) A transitory effect in the income growth rate and a permanent increase in its level.
(b) A permanent effect in the income growth rate and a transitory increase in its level.
(c) A permanent effect in the growth rate and the level of income.
0.5
19. In Averno, aggregate production can be represented as Yt = Kt0.5 (At Lt ) . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. The level
of productivity is At = A0 e0.03 t . Averno, at time t = 0, is at its balanced growth path. An earthquake
destroys half of the stock of capital of the economy at t = 1. The effect of the earthquake is
(a) A permanent reduction in the stock of capital per worker.
(b) The growth rate of income per worker increases permanently.
(c) The growth rate of income increases and starts falling until the economy moves back to its
balanced growth path.
(d) The growth rate of income falls permanently.
20. Consider two economies, Macondo and Metropolis. In both the technology to produce final good is
0.5
Yt = Kt0.5 (At Lt ) , where s = 0.2 and δ + n = 0.09. The productivity factor is At = e0.01 t . At time
t = 0 the stock of capital per worker in Macondo half of the stock of capital per worker in Metropolis.
(a) The growth rate of output per worker is higher in Macondo than in Metropolis.
(b) The growth rate of output per worker is higher in Metropolis than in Macondo.
(c) The level of income per worker in Macondo is half of the level of income per worker in Metropo-
lis at time t = 0.
21. In Kyrkania, aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Kyrkania, at
time t = 0, is at its steady state. The saving rate is reduced to s = 0.1. Then
(a) output per worker falls in 15%.
(b) output per worker falls in 50%.
(c) output per worker does not change.
22. In Narnia, aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Narnia, at
time t = 0, is at its steady state. The government liberalizes markets so that the saving rate increases
to s = 0.4. Then:
(a) Consumption falls and increases until it reaches a new higher steady state level.
(b) Consumption increases permanently.
(c) Consumption decreases permanently.
(d) The return to capital increases.

4
Exercises
23. The effects of immigration (17 points). In Micomicón aggregate production needs of capital and labor
0.5
according to the production function, Yt = Kt0.5 (A Lt ) , where A = 100 e0.01 t . Capital depreciates at
Ṅt
the rate δ = 0.09 and the population growth rate is Nt = n = 0.01. The investment rate is s = 0.2. In
this economy the labor force is Lt = 0.6 Nt .

(a) (6 points) Obtain the level of capital, consumption and income at the steady state in per capita
terms.
(b) (6 points) Assume that there has been a big inflow of immigrants to Micomicón at time t = 1.
Right before the arrival of immigrants, the size of the population was N1 = 100. The inflow of
immigrants amounts to ∆N = 20. After the arrival of immigrants, the size of the workforce is
Lt = 0.7 Nt . Find the new steady state for this economy. That is, find the level of capital, income
and consumption in per capita terms for the new steady state.
(c) (5 points) Show graphically the transition of consumption per capita towards the new steady state
since the moment of the arrival of immigrants.

5
24. Taxes and the Golden Rule (17 points). In Gotham the final good is produced with capital and labor,
0.5
Yt = Kt0.5 (At Lt ) . Population, Nt = e0.01 t , grows at a constant rate n and the depreciation rate of
capital is δ = 0.08. Hours worked Lt are a constant fraction of population, Lt /Nt = 1. Suppose that the
saving rate is s = 0.20, n = 0.01, At = 100 e0.01 t . Suppose further that families value equally private
consumption c and consumption of a public good g: they obtain utility from the total consumption, ct +gt .
Right now the Conservative party is in power. Taxes are zero and there is no public expenditure. The
economy was at a balanced growth path. At time t = t0 the Socialist Party won the election and raised
a tax rate on income equal to τ = 1/3. The tax revenues are used to finance public expenditures,
Nt gt = τ Yt . The socialist government keeps a balanced government budget.
(a) (10 points) Obtain the new balanced growth path. Do you think that voters should be happy with
this policy?
(b) (7 points) Obtain the transition path for income and consumption (in per capital levels) from the
original balanced growth path to the new balanced growth path.

6
 Economic Growth, year 2017-18
Midterm exam

Name: Exam B
Group:

Instructions

• This booklet cannot be unstapled. Incomplete booklets will be not graded.

• You have 1h and 15 minutes to answer this exam.

• Remember to write your name and your group number in the space provided.
• Scholastic dishonesty will not be allowed.

– There are 22 multiple choice questions and two exercises.

– Every correct answer in the multiple choice part adds 3 points and each incorrect answer
adds negative, -1 points. Unanswered questions are not counted.
– Mark the correct answer of the multiple choice part in the box below.
– You can use the back of the sheets of this booklet for your calculations.

Answers to multiple choice questions

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a a a a a a a a a a a a a a a a a a a a
b b b b b b b b b b b b b b b b b b b b
c c c c c c c c c c c c c c c c c c c c
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
a a a a a a a a a a a a a a a a a a a a
b b b b b b b b b b b b b b b b b b b b
c c c c c c c c c c c c c c c c c c c c

1
Multiple choice questions (60 points)
1. Consider two economies, Yoknapatawpha and Neopolis. In both countries the technology to produce
final good is Yt = Kt0.5 L0.5
t and both economies start out with the same level of capital per worker. In
Yoknapatawpha output per worker is increasing whereas in Neopolis output per worker is decreasing.
Thus,
(a) Both economies have the same investment rate.
(b) The investment rate of Neopolis is higher than that of Yoknapatawpha.
(c) The investment rate of Neopolis is lower than that of Yoknapatawpha.
0.5
2. In Colquide, aggregate production can be represented as Yt = Kt0.5 (At Lt ) . The saving rate is
s = 0.2, capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01.
The level of productivity is At = A0 e0.03 t . Colquide, at time t = 0, is at its balanced growth path. An
earthquake destroys half of the stock of capital of the economy at t = 1. The effect of the earthquake
is
(a) A permanent reduction in the stock of capital per worker.
(b) The growth rate of income per worker increases permanently.
(c) The growth rate of income increases and starts falling until the economy moves back to its
balanced growth path.
(d) The growth rate of income falls permanently.
0.5
3. In Doorn, aggregate production can be represented as Yt = Kt0.5 (Lt ) . The saving rate is s = 0.6,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Doorn, at
time t = 0, is at its steady state. The saving rate of the economy falls to s = 0.5. The effect is
(a) Capital and consumption per worker fall.
(b) Capital and income per worker falls.
(c) Consumption decreases.
(d) Income and consumption per worker fall.
1−α
4. In Estigia, production per worker can be represented as yt = ktα (At `Y ) , the level of innovation, At ,
η
is given by Ȧt = φ A1−η
t (`A Lt ) . Population Lt grows at a constant rate n0 . `Y + `A = 1. Assume that
the economy is at its balanced growth path. The government has implemented a subsidy to parents
per child born As a result, the population growth rate has increased, n1 > n0 . The effect is
(a) A transitory effect in the income growth rate and a permanent increase in its level.
(b) A permanent effect in the income growth rate and a transitory increase in its level.
(c) A permanent effect in the growth rate and the level of income.
5. In Genosha, aggregate production can be represented as Yt = Ktα (At ` Nt )1−α . The saving rate is
· ·

s ∈ (0, 1), N At gt
Nt = n and At = A e . ` represents hours worked per capita. Thus, total hours worked
t

are ` Nt . At the balanced growth path

(a) Output and capital per capita are constant.
(b) Output and capital per capita grow at the rate g + n.
(c) Output and capital per capita grow at the rate g.

2
 6. In Micomicón and Barataria the technology is Yt = Kt0.5 Lt0.5 . Income per worker in Micomicón is twice
the level of income per worker in Barataria. In spite of that, the capital to income ratio, Kt /Yt , is the
same in both countries. Then,
(a) Capital per worker in Micomicón is four times the level of capital per worker in Barataria.
(b) Capital per worker in Micomicón is half the level of capital per worker in Barataria.
(c) Capital per worker in Micomicón is equal to the level of capital per worker in Barataria.
7. According to Kaldor,
(a) The share of labor, wt Lt /Yt , is constant over time.
(b) The real wage, wt , is constant over time.
(c) Output per worker, Yt /Lt, is constant over time.
8. Which of these production functions can represent Gross Domestic Product taking into account the
Kaldor facts and that the capital-labor ratio, Kt /Lt , is increasing over time?
(a) Yt = Kt0.25 L0.75
t + 3 Kt .
 2
0.5
(b) Yt = 0.3 Kt0.5 + 0.7 (At Lt ) , At = e0.01 t .
(c) Yt = At Kt0.25 L0.65
t .
9. In Doorn, aggregate production can be represented as Yt = Ktα (At ` Nt )1−α . The saving rate is s ∈
Ṅt
(0, 1), N t
= n and Ȧ
At = g. Thus, total hours worked are ` Nt . An epidemic desease has halved
t

population at time t0 so that Nt0 = 0.5 Nt0 − . Per capita hours worked remain to be `. The economy
was at its balanced growth path. Right after the desease,
(a) Capital and income per capita are not affected.
(b) Capital per capita rises and falls again to its balanced growth path level.
(c) Production per capital falls and rises again to its balanced growth path level.
10. In Nordheim aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. At time t = 0
the stock of capital per worker is k0 = 1. In Aquilonia, the saving rate is s = 0.3. Both economies are
at their steady state. Suppose now that both economies open their capital markets, so that capital can
flow from one country to another one. Then,
(a) The return to capital is the same in both countries and, therefore, it does not move.
(b) Capital flows from Aquilonia to Nordheim.
(c) Capital flows from Nordheim to Aquilonia.
0.5
11. In Turan, aggregate production can be represented as Yt = Kt0.5 (At Lt ) . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. The level
of productivity is At = A0 e0.03 t . Turan, at time t = 0, is at its balanced growth path. The government
rises taxes at time t = 1. The effect of such policy is
(a) A permanent reduction in the level of income per worker, a transitory effect on the growth rate
of income per worker.
(b) A permanent reduction in the level of income per worker and the growth rate of income per
worker.
(c) A transitory reduction in the level of income per worker and the growth rate of income per
worker.
(d) A transitory reduction in the level of income per worker, a permanent effect on the growth rate
of income per worker.

3
12. In Archenland, aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Archenland,
at time t = 0, is at its steady state. The government liberalizes markets so that the saving rate increases
to s = 0.4. Then:
(a) Consumption falls and increases until it reaches a new higher steady state level.
(b) Consumption increases permanently.
(c) Consumption decreases permanently.
(d) The return to capital increases.
13. In Oleza aggregate production can be represented as Yt = Kt0.5 L0.5
t . The saving rate is s = 0.2, capital
depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. At time t = 0 the
stock of capital per worker is k0 = 1. Then, over time
(a) The return to capital grows over time.
(b) Capital, output, consumption (per worker) and the wage decrease over time. The real return
of capital increases over time.
(c) Capital, output, consumption (per worker) and the wage grow over time. The real return of
capital decreases over time.
14. In Genosha, aggregate production can be represented as Yt = Kt0.5 (At Lt )0.5 . The growth rate of
output is 3%, the growth rate of capital is 4% and the growth rate of hours worked is 1%. This, the
growth rate of the factor At is
(a) 0%.
(b) 1%.
(c) 2%.
15. In Turan, aggregate production can be represented as Yt = Kt0.5 Lt0.5 . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Turan, at
time t = 0, is at its steady state. The saving rate is reduced to s = 0.1. Then
(a) output per worker falls in 15%.
(b) output per worker falls in 50%.
(c) output per worker does not change.
16. In Cox the stock of capital per worker is twice the level in Jacarilla. Nevertheless, the return to capital
is the same in both countries. This is because
(a) The level of productivity in Jacarilla is the same that in Cox.
(b) The level of productivity in Jacarilla is twice that of Cox.
(c) The level of productivity in Jacarilla is half that of Cox.
17. According to Kaldor,
(a) The capital-output ratio, Kt /Yt , has no trend over time.
(b) The capital-output ratio, Kt /Yt , is increasing over time.
(c) The capital-labor ratio, Kt /Lt , is constant over time.

4
 R At α
18. In Rivendel, production per worker can be represented as yt = `1−α Yt 0
xjt d j, the level of innovation,
γ η
At , is given by Ȧt = φ At (`At Lt ) . The production of the intermediate goods xjt needs of capital,
xjt ≤ kjt , and paying the price of the patent of the idea, Qt . The patent has no time limit. Population
Lt grows at a constant rate n. `Y t + `At = 1. Assume that the economy is at its balanced growth path.
A new government reduces the life of the patent from infinity to 20 years, time after which anyone can
use the design. Then, in the long run,
(a) The level of innovation stays constant.
(b) The level of innovation increases.
(c) The level of innovation decreases.
α 1−α
19. In Osgiliath, aggregate production can be represented as Y1t = K1t H1t . The saving rate is s ∈ (0, 1),
capital depreciates at the rate δ ∈ (0, 1) and the level of human capital is H1t = eψ1 u1 L1t . The labor
force, Lt grows at the rate n ∈ (0, 1). The government of Osgiliath is worried because their level of
income per worker is lower than that of Tarascón. That is, Y1t /L1t = 0.5 (Y2t /L2t ). Nevertheless, the
capital to output ratio, Kt /Yt , is the same in both countries. So are the saving rate, depreciation of
capital and the population growth rate. Both countries are at their steady state. So the difference must
be due to
(a) The investment rate.
(b) Osgiliath grows at a rate lower than that of Tarascón.
(c) The schooling technology, ψ, is better in Tarascón than in Osgiliath.
20. According to Kaldor,
(a) Capital per worker, Kt /Lt is constant over time.
(b) The share of capital, (rt + δ) Kt /Lt , is constant over time.
(c) The capital to output ratio is growing over time.
21. Consider two economies, Yoknapatawpha and Neopolis. In both the technology to produce final good
0.5
is Yt = Kt0.5 (At Lt ) , where s = 0.2 and δ + n = 0.09. The productivity factor is At = e0.01 t . At
time t = 0 the stock of capital per worker in Yoknapatawpha half of the stock of capital per worker in
Neopolis.
(a) The growth rate of output per worker is higher in Yoknapatawpha than in Neopolis.
(b) The growth rate of output per worker is higher in Neopolis than in Yoknapatawpha.
(c) The level of income per worker in Yoknapatawpha is half of the level of income per worker in
Neopolis at time t = 0.
22. Estigia is an economy where productivity does not grow over time. A policy that reduces the population
growth rate will produce:
(a) A permanent increase in the growth rate of output per capita.
(b) A permanent increase in the level of consumption per capita.
(c) A reduction in the steady state level of investment in per capita terms.

5
Exercises
23. The effects of immigration (17 points). In Micomicón aggregate production needs of capital and labor
0.5
according to the production function, Yt = Kt0.5 (A Lt ) , where A = 100 e0.01 t . Capital depreciates at
Ṅt
the rate δ = 0.09 and the population growth rate is Nt = n = 0.01. The investment rate is s = 0.2. In
this economy the labor force is Lt = 0.6 Nt .

(a) (6 points) Obtain the level of capital, consumption and income at the steady state in per capita
terms.
(b) (6 points) Assume that there has been a big inflow of immigrants to Micomicón at time t = 1.
Right before the arrival of immigrants, the size of the population was N1 = 100. The inflow of
immigrants amounts to ∆N = 20. After the arrival of immigrants, the size of the workforce is
Lt = 0.7 Nt . Find the new steady state for this economy. That is, find the level of capital, income
and consumption in per capita terms for the new steady state.
(c) (5 points) Show graphically the transition of consumption per capita towards the new steady state
since the moment of the arrival of immigrants.

6
24. Taxes and the Golden Rule (17 points). In Gotham the final good is produced with capital and labor,
0.5
Yt = Kt0.5 (At Lt ) . Population, Nt = e0.01 t , grows at a constant rate n and the depreciation rate of
capital is δ = 0.08. Hours worked Lt are a constant fraction of population, Lt /Nt = 1. Suppose that the
saving rate is s = 0.20, n = 0.01, At = 100 e0.01 t . Suppose further that families value equally private
consumption c and consumption of a public good g: they obtain utility from the total consumption, ct +gt .
Right now the Conservative party is in power. Taxes are zero and there is no public expenditure. The
economy was at a balanced growth path. At time t = t0 the Socialist Party won the election and raised
a tax rate on income equal to τ = 1/3. The tax revenues are used to finance public expenditures,
Nt gt = τ Yt . The socialist government keeps a balanced government budget.
(a) (10 points) Obtain the new balanced growth path. Do you think that voters should be happy with
this policy?
(b) (7 points) Obtain the transition path for income and consumption (in per capital levels) from the
original balanced growth path to the new balanced growth path.

7
 Economic Growth, year 2017-18
Midterm exam answer key

Nombre: Versión B
Grupo:

Multiple choice questions (60 points)

1. Consider two economies, Yoknapatawpha and Neopolis. In both countries the technology to produce
final good is Yt = Kt0.5 L0.5
t and both economies start out with the same level of capital per worker. In
Yoknapatawpha output per worker is increasing whereas in Neopolis output per worker is decreasing.
Thus,
(a) Both economies have the same investment rate.
(b) The investment rate of Neopolis is higher than that of Yoknapatawpha.
(c) The investment rate of Neopolis is lower than that of Yoknapatawpha.
0.5
2. In Colquide, aggregate production can be represented as Yt = Kt0.5 (At Lt ) . The saving rate is
s = 0.2, capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01.
The level of productivity is At = A0 e0.03 t . Colquide, at time t = 0, is at its balanced growth path. An
earthquake destroys half of the stock of capital of the economy at t = 1. The effect of the earthquake
is
(a) A permanent reduction in the stock of capital per worker.
(b) The growth rate of income per worker increases permanently.
(c) The growth rate of income increases and starts falling until the economy moves back to its
balanced growth path.
(d) The growth rate of income falls permanently.
0.5
3. In Doorn, aggregate production can be represented as Yt = Kt0.5 (Lt ) . The saving rate is s = 0.6,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Doorn, at
time t = 0, is at its steady state. The saving rate of the economy falls to s = 0.5. The effect is
(a) Capital and consumption per worker fall.
(b) Capital and income per worker falls.
(c) Consumption decreases.
(d) Income and consumption per worker fall.
1−α
4. In Estigia, production per worker can be represented as yt = ktα (At `Y ) , the level of innovation, At ,
η
is given by Ȧt = φ A1−η
t (`A Lt ) . Population Lt grows at a constant rate n 0 . `Y + `A = 1. Assume that
the economy is at its balanced growth path. The government has implemented a subsidy to parents
per child born As a result, the population growth rate has increased, n1 > n0 . The effect is
(a) A transitory effect in the income growth rate and a permanent increase in its level.
(b) A permanent effect in the income growth rate and a transitory increase in its level.
(c) A permanent effect in the growth rate and the level of income.

1
 5. In Genosha, aggregate production can be represented as Yt = Ktα (At ` Nt )1−α . The saving rate is
· ·

s ∈ (0, 1), N At gt
Nt = n and At = A e . ` represents hours worked per capita. Thus, total hours worked
t

are ` Nt . At the balanced growth path

(a) Output and capital per capita are constant.
(b) Output and capital per capita grow at the rate g + n.
(c) Output and capital per capita grow at the rate g.
6. In Micomicón and Barataria the technology is Yt = Kt0.5 Lt0.5 . Income per worker in Micomicón is twice
the level of income per worker in Barataria. In spite of that, the capital to income ratio, Kt /Yt , is the
same in both countries. Then,
(a) Capital per worker in Micomicón is four times the level of capital per worker in Barataria.
(b) Capital per worker in Micomicón is half the level of capital per worker in Barataria.
(c) Capital per worker in Micomicón is equal to the level of capital per worker in Barataria.
7. According to Kaldor,
(a) The share of labor, wt Lt /Yt , is constant over time.
(b) The real wage, wt , is constant over time.
(c) Output per worker, Yt /Lt, is constant over time.
8. Which of these production functions can represent Gross Domestic Product taking into account the
Kaldor facts and that the capital-labor ratio, Kt /Lt , is increasing over time?
(a) Yt = Kt0.25 L0.75
t + 3 Kt .
 2
0.5 0.5
(b) Yt = 0.3 Kt + 0.7 (At Lt ) , At = e0.01 t .
(c) Yt = At Kt0.25 L0.65
t .
9. In Doorn, aggregate production can be represented as Yt = Ktα (At ` Nt )1−α . The saving rate is s ∈
(0, 1), Ṅ Ȧt
Nt = n and At = g. Thus, total hours worked are ` Nt . An epidemic desease has halved
t

population at time t0 so that Nt0 = 0.5 Nt0 − . Per capita hours worked remain to be `. The economy
was at its balanced growth path. Right after the desease,
(a) Capital and income per capita are not affected.
(b) Capital per capita rises and falls again to its balanced growth path level.
(c) Production per capital falls and rises again to its balanced growth path level.
10. In Nordheim aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. At time t = 0
the stock of capital per worker is k0 = 1. In Aquilonia, the saving rate is s = 0.3. Both economies are
at their steady state. Suppose now that both economies open their capital markets, so that capital can
flow from one country to another one. Then,
(a) The return to capital is the same in both countries and, therefore, it does not move.
(b) Capital flows from Aquilonia to Nordheim.
(c) Capital flows from Nordheim to Aquilonia.

2
 0.5
11. In Turan, aggregate production can be represented as Yt = Kt0.5 (At Lt ) . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. The level
of productivity is At = A0 e0.03 t . Turan, at time t = 0, is at its balanced growth path. The government
rises taxes at time t = 1. The effect of such policy is
(a) A permanent reduction in the level of income per worker, a transitory effect on the growth rate
of income per worker.
(b) A permanent reduction in the level of income per worker and the growth rate of income per
worker.
(c) A transitory reduction in the level of income per worker and the growth rate of income per
worker.
(d) A transitory reduction in the level of income per worker, a permanent effect on the growth rate
of income per worker.
12. In Archenland, aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Archenland,
at time t = 0, is at its steady state. The government liberalizes markets so that the saving rate increases
to s = 0.4. Then:
(a) Consumption falls and increases until it reaches a new higher steady state level.
(b) Consumption increases permanently.
(c) Consumption decreases permanently.
(d) The return to capital increases.
13. In Oleza aggregate production can be represented as Yt = Kt0.5 L0.5
t . The saving rate is s = 0.2, capital
depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. At time t = 0 the
stock of capital per worker is k0 = 1. Then, over time
(a) The return to capital grows over time.
(b) Capital, output, consumption (per worker) and the wage decrease over time. The real return
of capital increases over time.
(c) Capital, output, consumption (per worker) and the wage grow over time. The real return of
capital decreases over time.
14. In Genosha, aggregate production can be represented as Yt = Kt0.5 (At Lt )0.5 . The growth rate of
output is 3%, the growth rate of capital is 4% and the growth rate of hours worked is 1%. This, the
growth rate of the factor At is
(a) 0%.
(b) 1%.
(c) 2%.
15. In Turan, aggregate production can be represented as Yt = Kt0.5 L0.5 t . The saving rate is s = 0.2,
capital depreciates at the rate δ = 0.09 and the labor force, Lt grows at the rate n = 0.01. Turan, at
time t = 0, is at its steady state. The saving rate is reduced to s = 0.1. Then
(a) output per worker falls in 15%.
(b) output per worker falls in 50%.
(c) output per worker does not change.
16. In Cox the stock of capital per worker is twice the level in Jacarilla. Nevertheless, the return to capital
is the same in both countries. This is because
(a) The level of productivity in Jacarilla is the same that in Cox.
(b) The level of productivity in Jacarilla is twice that of Cox.
(c) The level of productivity in Jacarilla is half that of Cox.

3
17. According to Kaldor,
(a) The capital-output ratio, Kt /Yt , has no trend over time.
(b) The capital-output ratio, Kt /Yt , is increasing over time.
(c) The capital-labor ratio, Kt /Lt , is constant over time.
R At α
18. In Rivendel, production per worker can be represented as yt = `1−α Yt 0
xjt d j, the level of innovation,
γ η
At , is given by Ȧt = φ At (`At Lt ) . The production of the intermediate goods xjt needs of capital,
xjt ≤ kjt , and paying the price of the patent of the idea, Qt . The patent has no time limit. Population
Lt grows at a constant rate n. `Y t + `At = 1. Assume that the economy is at its balanced growth path.
A new government reduces the life of the patent from infinity to 20 years, time after which anyone can
use the design. Then, in the long run,
(a) The level of innovation stays constant.
(b) The level of innovation increases.
(c) The level of innovation decreases.
α 1−α
19. In Osgiliath, aggregate production can be represented as Y1t = K1t H1t . The saving rate is s ∈ (0, 1),
capital depreciates at the rate δ ∈ (0, 1) and the level of human capital is H1t = eψ1 u1 L1t . The labor
force, Lt grows at the rate n ∈ (0, 1). The government of Osgiliath is worried because their level of
income per worker is lower than that of Tarascón. That is, Y1t /L1t = 0.5 (Y2t /L2t ). Nevertheless, the
capital to output ratio, Kt /Yt , is the same in both countries. So are the saving rate, depreciation of
capital and the population growth rate. Both countries are at their steady state. So the difference must
be due to
(a) The investment rate.
(b) Osgiliath grows at a rate lower than that of Tarascón.
(c) The schooling technology, ψ, is better in Tarascón than in Osgiliath.
20. According to Kaldor,
(a) Capital per worker, Kt /Lt is constant over time.
(b) The share of capital, (rt + δ) Kt /Lt , is constant over time.
(c) The capital to output ratio is growing over time.
21. Consider two economies, Yoknapatawpha and Neopolis. In both the technology to produce final good
0.5
is Yt = Kt0.5 (At Lt ) , where s = 0.2 and δ + n = 0.09. The productivity factor is At = e0.01 t . At
time t = 0 the stock of capital per worker in Yoknapatawpha half of the stock of capital per worker in
Neopolis.
(a) The growth rate of output per worker is higher in Yoknapatawpha than in Neopolis.
(b) The growth rate of output per worker is higher in Neopolis than in Yoknapatawpha.
(c) The level of income per worker in Yoknapatawpha is half of the level of income per worker in
Neopolis at time t = 0.
22. Estigia is an economy where productivity does not grow over time. A policy that reduces the population
growth rate will produce:
(a) A permanent increase in the growth rate of output per capita.
(b) A permanent increase in the level of consumption per capita.
(c) A reduction in the steady state level of investment in per capita terms.

4
Exercises
23. The effects of immigration (17 points). In Micomicón aggregate production needs of capital and labor
0.5
according to the production function, Yt = Kt0.5 (A Lt ) , where A = 100 e0.01 t . Capital depreciates at
Ṅt
the rate δ = 0.09 and the population growth rate is Nt = n = 0.01. The investment rate is s = 0.2. In
this economy the labor force is Lt = 0.6 Nt .

(a) (6 points) Obtain the level of capital, consumption and income at the steady state in per capita
terms.
(b) (6 points) Assume that there has been a big inflow of immigrants to Micomicón at time t = 1.
Right before the arrival of immigrants, the size of the population was N1 = 100. The inflow of
immigrants amounts to ∆N = 20. After the arrival of immigrants, the size of the workforce is
Lt = 0.7 Nt . Find the new steady state for this economy. That is, find the level of capital, income
and consumption in per capita terms for the new steady state.
(c) (5 points) Show graphically the transition of consumption per capita towards the new steady state
since the moment of the arrival of immigrants.

5
24. Taxes and the Golden Rule (17 points). In Gotham the final good is produced with capital and labor,
0.5
Yt = Kt0.5 (At Lt ) . Population, Nt = e0.01 t , grows at a constant rate n and the depreciation rate of
capital is δ = 0.08. Hours worked Lt are a constant fraction of population, Lt /Nt = 1. Suppose that the
saving rate is s = 0.20, n = 0.01, At = 100 e0.01 t . Suppose further that families value equally private
consumption c and consumption of a public good g: they obtain utility from the total consumption, ct +gt .
Right now the Conservative party is in power. Taxes are zero and there is no public expenditure. The
economy was at a balanced growth path. At time t = t0 the Socialist Party won the election and raised
a tax rate on income equal to τ = 1/3. The tax revenues are used to finance public expenditures,
Nt gt = τ Yt . The socialist government keeps a balanced government budget.
(a) (10 points) Obtain the new balanced growth path. Do you think that voters should be happy with
this policy?
(b) (7 points) Obtain the transition path for income and consumption (in per capital levels) from the
original balanced growth path to the new balanced growth path.