DEPARTMENT OF ECONOMICS ES20014 Intermediate Macroeconomics 2
Part A [30%] Answer ONE question
Q1 Solve for output-per-person in the basic Romer model. Critically assess the effect that technological advancement could have on the balanced growth path and provide the intuition for your results.
Q2 Consider the household problem in a benchmark two-period OLG framework. Using the following functional form for the utility function
𝑈(𝑐,𝑐) = ln(𝑐) + 𝛽𝑐
derive the level of savings, consumption when young and consumption when old. Critically assess the effect that a change in labour productivity could have on household’s savings decision and provide the intuition for your results.
Part B [30%] Answer ONE question
Q3 Consider a profit maximising firm that operates in a perfectly competitive market. The firm uses a constant return to scale Cobb-Douglas production function with three inputs into production: Physical capital: 𝐾, labour: 𝐿, and human capital: 𝐻
a) [50%] Show the effect that human capital has on marginal product of capital and marginal product of labour and provide the economic intuition.
b) [50%] Using this modified model of production, explain why capital may flow from poor to rich countries
Q4 Consider the Solow model with a profit maximising firm that operates in a perfectly competitive market. Assume the following Cobb-Douglas production function
𝑌 = 𝐴̅𝐾/𝐿/
3
a) [50%] Derive the steady state level of wages in the Solow model and explain why the economy reaches a steady state in the long run.
b) [50%] Suppose that the investment rate increases permanently. Demonstrate, mathematically and graphically, the effect that this increase has on the steady state level of wages. Provide the intuition for your results.
Part C [40%] Answer ONE question. Word limit 1000 words
Q5 Using the combined Solow-Romer model as your analytical framework, critically assess whether the recent covid crisis could have affected the outlook for long-run economic growth.
What recommendation would you give policymakers to ensure sustained economic growth following the covid crisis?
Q6 Using the combined Solow-Romer model as your analytical framework, critically assess the key factors driving economic growth over the past 100 years and explain why we observe different living standards across countries. What recommendation would you give policymakers that want to promote robust future economic growth?
