Mock Exam

Advanced Macroeconomics I
Christian Manger xx.xx.2025

Winter Semester 2024/25

Consider a Solow model without technological progress:

L̇ = nL (1)

K̇ = sY − δK (2)
α 1−α
Y = K L (3)

(a) Explain the economic intuition behind (2).

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(b) Express per-capita output and the real wage as function of the capital labour ratio

k = K/L.

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(c) Compute the steady state level of k.

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(d) Explain how the properties of the Neoclassical production functions make sure that we

have a unique steady state with k∗ > 0 (of course keeping our standard assumptions

for the Solow model).

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(e) Evidence shows a negative correlation between wages and fertility. Name and briey

explain one economic reason.

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(f ) Assume that population grows at rate n if w < w and it grows at rate n′ < n if
w ≥ w. Illustrate in a diagram why there can be two steady states with k > 0. Specify
parameter restrictions for which there are two such steady states.

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(g) Name and briey explain one policy measure that could help a country to escape the

low-income steady state.

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2. Consider a Ramsey-Cass-Koopmans model without technological progress and without de-

preciation, described by the following equations

ċt f ′ (kt ) − ρ
= (4)
ct θ
k̇t = f (kt ) − ct − nkt (5)
RT ′
0 = lim e− 0 f (kt )dt+nT kT (6)
T →∞

(a) What is the interpretation of θ? Explain economically the eect of θ on ĉt . What's the

eect of an increase in θ on k and c on the balanced growth path?

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(b) Draw the phase diagram, including arrows describing the dynamics, and the saddle

path.

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(c) Assume the economy is on its balanced growth path. Suddenly and unexpectedly, the

country starts to receive development aid from abroad. The development is d (constant,
exogenous) units of wealth for each person of the Lt people in the economy in every

period, is directly paid from abroad to the households and must never be paid back

(free lunch). Use the phase diagram to illustrate the short-run and the long-run eects

on c and k.

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(d) Is consumption maximised on the balanced growth path? Why (not)?

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(e) Can the government increase (household) consumption on the balanced growth path?

Explain intuitively how or why not! Is such a policy socially benecial? Explain!

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(f ) Can this RCK-model explain long-run growth if you assume that workers' productivity

grows at the exogenous rate g? Which mechanism gives rise to this result?

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3. Consider a Diamond model with a learning-by-doing externality. Two-period lived households

supply one unit of labour in the rst period, consume only in the second period, and they

transfer wealth between periods by holding shares in capital. Lt is the number of young

households in period t, and the population grows at rate n. There is a continuum i ∈ [0, 1]
of rms, each with technology Yti = Ktiα (At Lti )1−α , and labor eciency depends on the
aggregate capital-labor-ratio according to At = Kt /Lt .

(a) Compute the real wage. Using the learning-by-doing externality, show how the real

wage depends on the capital-labour-ratio. Solution: wt = (1 − α)Kt /Lt .

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(b) What equation describes the evolution of Lt ?

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(c) What equation describes the evolution of Kt ?

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(d) Use these two equations to derive one equation describing the evolution of

kt = Kt /Lt .

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(e) What is the growth rate of kt on the balanced growth path? How does the growth rate

depend on α? Explain why.

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(f ) Assume that the economy is on its balanced growth path. Suddenly, the swine u kills

a sizable share of the population at t = 0. Illustrate the evolution of y and r over time

in separate diagrams with t on the horizontal axis.

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