EC441: Problem Set 5Multiple-choice questionsThe next four questions concern the Malthusian model. S

EC441: Problem Set 5Multiple-choice questionsThe next four questions concern the Malthusian model. Suppose that the productivity of landincreases so for a given level of labor, output increases. Answer the following questions about theeffect on the economy relative to the initial (pre-change) steady state:1. In the long run, output per person will beA) GreaterB) LowerC) No changeD) Ambiguous2. In the long run, population will beA) GreaterB) LowerC) No changeD) Ambiguous3. In the long run, total (aggregate) output will beA) GreaterB) LowerC) No changeD) Ambiguous4. In the long run, the death rate (at the new steady state) will beA) GreaterB) LowerC) No changeD) Ambiguous5. Suppose that in the Solow model the long run capital per capita is 5. Suppose that the currentcapital per capita is 2. Then current savingsA) Equals depreciation plus population growthB) Is greater than depreciation plus population growthC) Is greater than depreciation plus population growth1 D) Cannot say with numbers provided6. Suppose that the world is a collection of countries each following the Solow model with thesame fundamentals (production function, population growth, depreciation), but different levelsof capital per worker. Which of the following should happen:A) The poor countries should grow faster than the richB) The rich countries should grow faster than the poorC) All countries grow at the same rateD) There is no growth in any countryThe next four questions concern the Solow model. Suppose the government discourages savingsby taxing capital and using the money to subsidize consumption. Think of this as a decline inthe savings rate. Answer the following questions about the effect on the economy relative to theinitial (pre-change) steady state:7. In the long run, output per person will beA) GreaterB) LowerC) No changeD) Ambiguous (cannot sign the change for certain)8. Compared to the original steady state, consumption per person in the new long-run steady statewill beA) GreaterB) LowerC) No changeD) Ambiguous (cannot sign the change for certain)9. Along the transition to the new steady state, output per person will be:A) IncreasingB) DecreasingC) ConstantD) Ambiguous (cannot sign the change for certain)10. In the new long-run steady state, the growth rate of output per capita compared to the originalsteady state will be:A) GreaterB) LowerC) No changeD) Ambiguous (cannot sign the change for certain) 2 Short-answer questions1. Consider the effect of giving aid to a developing economy. Let a be the amount of aid per persongiven each year. â€œTotal income availableâ€ for a country in per capita terms is then y + a, where yis the amount of domestic output per capita. Start each economy from a steady state.(a) Describe what happens in a Malthusian economy. In particular, assume that what determinesmortality and fertility is total income available. Describe what happens in the new steadystate to (a) per capita output produced, (b) per capita consumption (which is equal to percapita total income available, as there is no saving in this model), and (c) population.(b) Describe what happens in a Solow economy. In particular, assume that savings is an sfraction of total income available (s is the saving rate). Describe what happens in the newsteady state to (a) per capita output produced, (b) per capita consumption, and (c) capitalper capita.(c) Drawing on your answers from above, do you think that aid will help the poorest countries grow faster? Give some intuition of why growth may have different effects given theunderlying nature of the economy. 3