a) Explain the economic effects according to the basic Solow model of a decrease (at some time) in the population growth rate from one constant level to a new lower constant level. How does this affect the transition diagram and the Solow diagram? How does it affect the steady state values of capital, income and consumption per worker? Explain qualitatively the transition from the old steady state to the new one: What initiates the growth process, and what keeps it alive for some time? b) Now consider the following parameterization of the basic Solow model where B=1, α=1/3, δ= 0.05, n=0.03, and s=0.08. Assume that in period zero the economy is in steady state at these parameter values, and then the population growth rate drops to 0.01, other parameters remaining unchanged. (This is illustrative for a developing country getting population growth down to western rates.) By how many percent does the reduction by 2/3 in the population growth rate increase the steady state values of capital, income, and consumption per worker, respectively? c) Show in a diagram the evolution of income and consumption per worker, and the growth rate of income per worker. Comment with respect to what a developing country can obtain by birth control according to the Solow model.
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