Question

Macro

Directions:
To solve the questions below you will need to use the following equations of the Solow model:

1. The production function: y = Ak a .
2. The change in capital per worker: Dk = sf (k ) -d*k

Whereas the steady state defined as: sf(k*)=dk*

3. During the 1990s there was a huge immigration from former USSR. Assume that the savings rate (s) is the same for the population in Israel and the immigrants from former USSR. Assume also that the immigrants did not bring with them capital goods.

a. Use the Solow model to explain the following:
What happened right after the arrival of the immigrants (i.e. in the short run) to:

1. the capital per worker
2. the product per worker

b. Will the product per worker and capital per worker of the new steady state (i.e in the long run) be different than the product per worker and capital per worker of the steady state that was before the arrival of the immigrants?

c. Explain what happens to the investment from the time of arrival until reaching the steady state.

Answer 1

a)

There will be a rise in population when immigration rises, Thus, immediately the capital per worker and output per worker will decline.

b)

Over the long run, the economy once again comes to the old equilibrium or same level of steady-state. There will be no difference between the long-run steady-state level and steady-state level that was prevailing before the arrival of the immigrants.

c)

Investment per worker will rise and economy will reach the previous level of steady state.