1. Explain what is meant by a steady state. In the Solow model, which variables are constant in a steady state?

The steady state is an equilibrium condition for our growth model.  In our steady state, the effects of per capita investment are exactly offset by the effects of population growth and depreciation of capital.  Therefore, in the steady state we have no change in the capital-to-labor ration giving a constant output per worker, investment per worker, and consumption per worker.

 2. According to our model of economic growth, if there is no productivity growth, what will happen to output per worker, consumption per worker, and capital per worker in the long run?

This in many way is just a repeat of #1.  They are all constant.  The reason for the repeat is to show the great important of continual productivity growth or we will not have growth.

 3.  True or false? The higher the steady-state capital-labor ratio is, the more consumption each worker can enjoy in the long run. Explain your answer.

The statement is false. Increases in the capital-labor ratio increase consumption per worker in the steady state only up to a point. If the capital-labor ratio is too high, then consumption per worker may decline due to diminishing marginal returns to capital, and the need to divert much of output to maintaining the capital-labor ratio.  Try to put this in potato terms and I think you will understand

 4. What effect should each of the following have on long-run living standards, according to the Solow model (our growth model)?

                a. An increase in the saving rate.

                b. An increase in the population growth rate.

                c.  A one-time improvement in productivity.

        (a) An increase in the saving rate increases long-run living standards, as higher saving allows for more investment and a larger capital stock.  Just remember that this can have a Golden Rule issue with per capita consumption.

(b)  An increase in the population growth rate reduces long-run living standards, as more output must be used to equip the larger number of new workers with capital, leaving less output available to increase consumption or capital per worker.

(c)  A one-time increase in productivity increases living standards directly, by increasing output, and indirectly, since by raising incomes it also raises saving and the capital stock.

5.  Suppose that you are hired by our next president to promote continued growth in the United States.  Provide a two-page essay illustrating your suggestions to the president and our government.  Be sure to illustrate your ideas with examples and make sure everything is relevant for 2018.

So many possible answers.  We examine several factors in class on Friday and Monday.