In the 2013 AM mock, question 5-B, they state in the answer key that increasing the maximum allowable contribution amount to retirement accounts will " most likely increase the rate of savings and investment , and therefore increase the growth rate of capital stock (deltaK/K).
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However, in the readings, (reading 18, p. 131, in the grey box), the example is as follows:
“The savings rate for a national economy is comparatively stable. The economy faces a sharp uptick in energy prices and at the same time imposes stringent restrictions on environmental pollution. The combined impact of energy and environmental factors renders a large portion of the existing stock of manufacturing equipment and structures economically obsolescent. What is the impact on the economy according to Equation 3?”
with the answer being…“The sudden, unexpected obsolescence of a significant portion of the capital stock means that the percentage growth rate in capital stock in that period will be negative, that is, ΔK/K < 0”
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The latter makes much more sense, but why does the amount of money saved in retirement account affect the stock of manufacturing equipment (assuming the latter definition is correct)?
The gross capital stock is defined as the value of all fixed assets still in use. Fixed assets are all produced assets that are used repeatedly or continuously in the production process for more than a year. Main assets types are: Metal products, machinery and transport equipment, housing, non-residential construction and other products (including products of agriculture, forestry, fisheries and aquaculture). It excludes land. Net capital stock is the gross capital, at a point in time, less the consumption of fixed capital accrued up to that point. It takes into account the depreciation of the assets through time as a result of physical deterioration, foreseeable obsolescence or normal accidental damage.
Never mind, I got it. Higher retirement account contributions = higher level of investment into stocks/bonds = more money for corporations to put to work = more investment in capital stock.
^^ i dont think your analysis is quite right when it comes to answering the question. when new environmental regulations are imposed, your machines become obscelete since you need to replace them with new machines (since the one you got do not abide by the new law). thus your machines would become obscelete and you would have to buy new ones to comply with the regulations.
if they ask for installment of filters the same would apply, they would not become obscelete however you would need to incur a fixed cost to install those filters which in turn lowers savings thus lower your gdp.
I remember doing this question asking about higher retirement account contributions and I must say I don’t totally agree. As I was thinking when taking this test:
Higher retirement account contributions = higher retirement accunt balances = more people retire (some even take early retirement) = fewer workers are left = labour force declines = GDP growth declines
Can someone spot any mistakes in my understanding above?
higher retirement account contributions is not early retirement option i guess.
i think higher retirement account contributions would increase the eq of goods and services thus increase the gdp since you are receiving more $$. if its an early retirement option then total participation of labor would decrease and labor force would decrease.
What I meat is that people thing they have already accmulated enough money for thier retirement expenses (thorugh increased contributions) that they no longer have to work (ie. don’t have to lenghten work periods because of lack of funds for retirement). They simply retire as early as possible. Not necessairly take early retirement provisions/options.