Question

Question 7 Suppose an economy begins in steady state which has a production function of Y = ĀK3L3. By what proportion does per capita GDP change in the long run (at the steady state) in response to each of the following changes? (a) The investment rate doubles. (b) The depreciation rate falls by 10%. (c) The productivity level rises by 10%. (d) An earthquake destroys 75% of the capital stock. (e) A more generous immigration policy leads the population to double.

Answer 1

8.) (6) According to the function of ( According to the function given Y: ÁK's [tar. e investment rate doubles, the GDP will also double because an in ouease in investment rate causes the capital stock to rise (K) which leads to invease in ber capital GDP. (6) According to the bo According to the function given y = Ã Kit, as depreciation falls by 10% , then LDP will also fall by 10% because as depreciation falls, the capital stock (k) will also fall which leads to fall in the per capital 41DP. (c) According to the finction given = A k3 , as productivita level rises by 10%, the end fer capital GDP will also a rise by 10% because an increase in productivity of capital (k) and labour (L) has a direct relation with increase iny. (d) According to the function given Y = Ã KŠ (%, as an earthquake destroys 705% of the capital stock, per capital GDP will also falls by 75% because as K fall per capital GDP will allo fall. Scanned with CamScanner

(e) According to the function given y = Ã K L } , the the more generous immigration policy leads the population to double the ber capital GDP will ette . full by 50% Investrong 18**o? Strada as we see in diagram, the increase in population from 1. Sfrk) ni to an in the line presenting population growth and depreciation KI will shift upward which reduces Capital ber worken capital stock ki to K2 and hence ber capita GDP will fall by 50%. Scanned with CamScanner Investment OK,