Question 18 1 pts Consider the Solow growth model Suppose yo

Question 18 1 pts Consider the Solow growth model. Suppose you have two countries, Japan and South Korea. Looking through their very detailed statistics that both countries collect, you discover that these countries are virtually identical. You notice that both countries have the same population (N). Population grows at the same rate (gN > 0) in both countries, and everyone in the economy works (that is, population and employment are the same thing) You also notice that both countries have the same production function [Y-F(K; AN)], and the production function satisfies the assumptions of the Solow model. Both economies depreciate capital at the same rate, ?, and in both countries technology advances at the same rate (gA > 0). Both economies have the same savings rate, s. You dig deeper into the similarities of these two countries, and you discover that this year, total output in both countries is identical. You also note that both countries are in steady state. Suppose now that population growth in Japan increases. We should expect that

Solution

When Japan reaches a new steady state output per capita in Japan will grow at the same rate as output as per capita in South Korea.

Increase in population rate only has temporary effect. It leads to increase in growth rate of aggregate output but has no permanent effect on growth rate of output per capita.