Macroeconomics I, UC3M
Homework 3
Exercise 1: Convergence
Consider an economy with a production function Y = K α L1−α . Let α = 0.5, the savings
rate be 0.2, capital depreciates at a rate of 5%, and the population grows at 5%.
a. What is the level of capital, production, and consumption per worker in the steady
state of this economy?
b. Suppose that in the first period, the total labor force is L1 = 100, and the capital stock
is K1 = 200. Calculate the production level Y1 and the following variables expressed
in per-worker terms: k1 , y1 , c1 , sy1 , and (δ + n)k1 for period 1.
c. Suppose an identical country except that in the first period, the total labor force is
L1 = 100 and the capital stock is K1 = 300. Calculate the production level Y1 and
the following variables expressed in per-worker terms: k1 , y1 , c1 , sy1 , and (δ + n)k1 for
period 1. Explain the difference in the growth rate of capital per worker.
Exercise 2: Solving the Solow Model with Excel
Consider the economy in the previous exercise, except that now α = 0.36. As before, s = 0.2,
δ = 0.05, and n = 0.05.
1. What is the steady state capital per worker, output per worker, and consumption per
worker in this economy?
2. Assume in period one, the total workforce is L1 = 100 and the capital stock be K1 = 30.
Solve for output Y1 and for the following variables in per worker terms: k1 , y1 , c1 , sy1 ,
and (δ + n)k1 .
3. Use Excel to compute for periods 2 − 5: k2:5 , y2:5 , c2:5 , sy2:5 , (δ + n)k2:5 , and Y2:5 .
∆k ∆y ∆c ∆Y
4. Compute for periods 2 − 5 the growth rates k
, y , c, and Y
.
5. What is the model’s answer to why some countries like China have extremely high
growth rates in output per worker?
1
Exercise 3: Population growth
Consider an economy with a production function Y = AK 0.5 L0.5 , where A is a constant
equal to 2. The savings rate is 0.2, capital depreciates at a rate of 4%, and the population
grows at 6%.
a. Interpret the meaning of A. What does a higher value of A mean?
b. Obtain an expression for output and investment per worker in terms of capital per
worker (y, i).
c. What is the level of capital (k), production (y), and consumption (c) per worker in
the steady state of this economy?
d. Suppose that the population growth rate decreases to 1%. What is the level of capital,
production, and consumption per worker in the steady state of this economy? Graph-
ically represent both equilibria in the Solow Diagram (with y in the vertical axis and
k in the horizontal axis) and the evolution of per capita variables from the first steady
state to the new one.
Exercise 4: Immigration
Suppose that an economy is in its steady state when it suddenly receives a notable influx
of workers, which, however, does not change the initial population growth rate. Before the
arrival of the new workers, represent the initial equilibrium in the Solow Diagram (with
(y, k) in the vertical and horizontal axis). Then, mark in your Solow Diagram the economic
situation immediately after the arrival of immigrants. Describe how the economy converges
towards the final steady state.
Exercise 5: Savings rate
Consider an economy with a production function Y = 4K 0.5 L0.5 . The savings rate is 0.2,
capital depreciates at a rate of 4%, and the population grows at 6%.
a. What is the level of capital, production, and consumption per worker in the steady
state of this economy?
b. Suppose that the savings rate increases to 25%. What is the level of capital, production,
and consumption per worker in the steady state of this economy? Graphically represent
equilibria in the Solow Diagram (with axis (y, k)) and the evolution of per capita
variables from the first steady state to the new one.
c. What do you conclude about the impact of a change in the savings rate on the growth
rate of per-worker output?
