EC2B1- Macroeconomics
Wouter Den Haan
Fourth assignment
The classes will concentrate on sections B & C.
A Discussion questions
The purpose of this type of question is to stimulate critical thinking and your
creativity.
Question A.1. What should the government’s role be in R&D in general? First
try to answer under the assumption that the Romer model is correct. After that
feel free to go beyond the Romer model and/or bring in other arguments.
Question A.2. Does your answer to the second part of the last question change
if the question is about R&D in the pharmaceutical industry?
Question A.3. What should the government’s role be in funding education?
Although there is no education in the Romer model, it would be good to first
try to answer using the logic of the Romer model. After that feel free to go
beyond the Romer model and/or bring in other arguments.
B The Romer model
Question B.1. (From Jones & Vollrath Chapter 5) Suppose that there is a one-
time increase in the productivity of research, represented by an increase in θ
in Figure 5.1. What happens with the growth rate and the level of technology
over time?
Question B.2. (From Jones & Vollrath Chapter 5) Consider the level of per
capita income along a balanced growth path given by equation (5.11).
1. s R has both a positive and a negative effect on per capita income. Give
an intuitive explanation for both.
2. Find the value for s R that maximizes output per worker along a balanced
growth path for this example. Why is it possible to do too much R&D
according to this criterion?
Question B.3. Suppose that there is a sudden permanent increase in the sav-
ings rate.
1. Remind yourself of the transition dynamics in the Solow model.
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2. Part of what happens in the Romer model resembles what happens in the
Solow model. Are there other mechanisms? Don’t manipulate equations.
Think of the structure of the model and what the different “actors” in the
model do. How are these choices affected?
C Python: Balanced growth & transition dynamics
!!! You won’t get Python exercises for a while. Moreover, for those who are
beginners we have provides a template in which you only have to fill in just a
few steps. And the *.py template includes several comments on Python pro-
gramming (the Jupyter notebook has less educational Python comments but
include in the code economic formulas).
This question continues part D of assignment #3.
1. Calculate and plot time paths for the growth rate Ȧ/A and the levels L A
and A for the following cases.
• n = 0.02, λ = 1, φ = 0, L A (1) = 1, and A(1) = 1/n.
• n = 0.02, λ = 1, φ = 0, L A (1) = 1, and A(1) = 0.1/n.
• n = 0.02, λ = 1, φ = 0, L A (1) = 1, and A(1) = 50/n.
• n = 0.02, λ = φ = 1/2, and L A (1) = 1 and A(1) = (1/n)2 .
• n = 0.02, λ = φ = 1/2, and L A (1) = 1 and A(1) = 0.1(1/n)2 .
• n = 0.02, λ = φ = 1/2, and L A (1) = 1 and A(1) = 50(1/n)2 .
2. What are the checks you can perform to convince yourself that your pro-
gram is correct?
3. Can you intuitively and clearly explain the behavior of A and its growth
rate for the different initial conditions?
4. There is a striking difference between the case with λ = 1 and φ = 0
and the case with λ = φ = 1/2. What is that difference and what is the
explanation?
D Additional (Python) exercise
Suppose that
Ȧ = LλA Aφ , (1)
where Ȧ = dA/dt. Note that we have set the value of θ equal to 1. We assume
that L A grows at rate n equal to 0.02 and we set φ equal to 0.
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Suppose the economy is on a balanced growth path and λ = 1. Suddenly
λ drops to 0.9. We know that this will lead to a reduction in the steady state
growth rate of A. But it is possible that the growth rate (i) first increases, (ii)
stays the same on impact and then falls, and (iii) falls on impact. Explain.
Hint: This is not a deep question and no complicated calculations or algebra
are needed. But feel free to check your answer with the program you wrote for
part C of this assignment.
