MEcon Master of Economics Master of Economics: Economic Growth 2 — Questions and Answers
Question 1: In the Ramsey-Cass-Koopmans model, what determines the optimal consumption growth rate?
- The government's fiscal policy stance
- The difference between the real interest rate and the rate of time preference divided by the elasticity of intertemporal substitution (Correct answer)
- The depreciation rate of capital minus population growth
- Total factor productivity growth alone
Correct answer: The difference between the real interest rate and the rate of time preference divided by the elasticity of intertemporal substitution
The Euler equation in the Ramsey model shows consumption grows at a rate equal to (r - ρ) / σ, where r is the interest rate, ρ is the discount rate, and σ is the inverse of the elasticity of intertemporal substitution.
Question 2: Which empirical phenomenon motivated the development of endogenous growth theory over the Solow model?
- Convergence of per-capita incomes across all countries
- Persistent differences in growth rates across countries with similar savings rates (Correct answer)
- Declining returns to capital in developed economies
- Rapid population growth in industrialized nations
Correct answer: Persistent differences in growth rates across countries with similar savings rates
Endogenous growth theory emerged because the Solow model predicted conditional convergence, but empirical data showed persistent divergence in growth rates even among countries with comparable fundamentals.
Question 3: In a model with human capital accumulation à la Lucas (1988), what drives sustained long-run growth?
- Physical capital accumulation subject to diminishing returns
- External effects of average human capital on productivity (Correct answer)
- Exogenous technological progress set by the government
- Natural resource endowments
Correct answer: External effects of average human capital on productivity
Lucas's model generates sustained growth through the external effects of average human capital on total factor productivity, which offsets diminishing returns to individual human capital investment.
Question 4: The 'variey expansion' version of the AK-type endogenous growth model associates long-run growth with:
- Rising depreciation of existing capital goods
- Increasing number of differentiated intermediate goods produced by monopolistically competitive firms (Correct answer)
- Fixed technology frontiers in developed countries
- Declining real wages due to automation
Correct answer: Increasing number of differentiated intermediate goods produced by monopolistically competitive firms
In Romer's (1990) variety-expansion model, growth is sustained by the continuous introduction of new varieties of intermediate goods, each produced by a firm with monopoly power over its variety.
Question 5: What does the 'Iron Law of Convergence' in cross-country empirics approximately state?
- Countries converge at exactly 2% per year regardless of initial income
- Conditional on structural characteristics, economies close about 2% of their income gap per year (Correct answer)
- All countries will reach the same steady state within 50 years
- Unconditional convergence occurs at a rate of 5% annually
Correct answer: Conditional on structural characteristics, economies close about 2% of their income gap per year
Barro and Sala-i-Martin found that, conditional on determinants of the steady state, countries tend to converge to their steady states at roughly 2% per year—a remarkably stable empirical regularity.
Question 6: In quality-ladder (Schumpeterian) growth models, what is the mechanism that drives long-run growth?
- Saving rates permanently above the golden rule
- Successive innovations that replace older, lower-quality products through creative destruction (Correct answer)
- Government subsidies to incumbent firms
- Population growth increasing the scale of the economy
Correct answer: Successive innovations that replace older, lower-quality products through creative destruction
Grossman-Helpman and Aghion-Howitt quality-ladder models generate growth through creative destruction: new innovators replace incumbents with higher-quality products, permanently raising productivity.
Question 7: Which condition defines the 'Modified Golden Rule' in the Ramsey model with a positive time preference rate (ρ > 0)?
- f'(k*) = δ + n
- f'(k*) = δ + n + ρ (Correct answer)
- f'(k*) = ρ - n
- f'(k*) = δ - ρ
Correct answer: f'(k*) = δ + n + ρ
In the Ramsey model, the steady-state capital satisfies f'(k*) = δ + n + ρ (plus growth in consumption technology), which differs from the Golden Rule f'(k) = δ + n because households discount the future at rate ρ.
MEcon Master of Economics Master of Economics: Economic Growth 2
In the Ramsey-Cass-Koopmans model, what determines the optimal consumption growth rate?