MEcon Master of Economics Master of Economics: Economic Growth 2

Question 1

In the Ramsey-Cass-Koopmans model, what determines the optimal consumption growth rate?

Accepted Answer

The difference between the real interest rate and the rate of time preference divided by the elasticity of intertemporal substitution

Answer

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?

Accepted Answer

Persistent differences in growth rates across countries with similar savings rates

Answer

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?

Accepted Answer

External effects of average human capital on productivity

Answer

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:

Accepted Answer

Increasing number of differentiated intermediate goods produced by monopolistically competitive firms

Answer

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?

Accepted Answer

Conditional on structural characteristics, economies close about 2% of their income gap per year

Answer

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.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics Master of Economics: Economic Growth 2