A closed economy is currently in its steady state. Recently, the economy had a wildfire, and...
A closed economy is currently in its steady state. Recently, the economy had a wildfire, and the wildfire had destroyed some of the capital. As a result, the stock of capital falls by 5%.
- In the context of the long-run classical model, what happens to the long-run equilibrium levels real interest rate? Explain and support your answer with ONE the diagram for the market for loanable funds.
- According to the Solow Model, what happens to the steady-state capital-labour ratio? In the new steady state what happens to the growth rate of output per worker? Explain and support your answer with ONE appropriate diagram. Be sure to explain what happens to the variables of interest during transition to steady state.
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A closed economy is currently in its steady state. Recently, the
economy had a wildfire, and...
Consider an economy that is characterized by the Solow Model. The (aggregate) production function is given...
Consider an economy that is characterized by the Solow Model. The (aggregate) production function is given by: Y = 6K1/3L2/3 In this economy, workers consume 80% of income and save the rest. The labour force is growing at 2% per year while the annual rate of capital depreciation is 5.5%. a) Solve for the steady state capital-labour ratio and consumption per worker. The economy is in its steady state as described in part (a). Suppose both the stock of capital...
Consider a version of the Solow model where the population growth rate is 0.05. There is...
Consider a version of the Solow model where the population growth rate is 0.05. There is no technological progress. Capital depreciates at rate ? each period and a fraction ? of income is invested in physical capital every period. Assume that the production function is given by: ?t = ?t1/2 ?t1/2 where ?t is output, ?t is capital and ?t is labour. a. Derive an expression for the accumulation of capital per worker in this economy, i.e. ∆?t+1 where ?t...
6. An earthquake: Consider a Solow economy that begins in a steady state. Then a strong...
6. An earthquake: Consider a Solow economy that begins in a steady state. Then a strong earthquake destroys half the capital stock. Use a Solow diagram to explain how the economy behaves over time. Draw a graph showing how output evolves over time, and explain what happens to the level and growth rate o per capita GDP. (Hint: Pay close attention to footnote 4 on page 121 - does any curve shift?)
page 3 3. a. Given that a country at steady state engages in a cross border war with its neighbour and suffers significant infrastructure damage, illustrate and explain what will happen to the cou...
page 3 3. a. Given that a country at steady state engages in a cross border war with its neighbour and suffers significant infrastructure damage, illustrate and explain what will happen to the country's capital stock and output per worker if it maintains its 5 marks saving rate post-war. b. Given the scenario above, illustrate and explain what will happen to the country's capital stock and output per worker if it increases its saving rate after 10 years. 5 marks...
5. Foreign aid: Consider a Solow economy that begins with a cap to $300 billion, and...
5. Foreign aid: Consider a Solow economy that begins with a cap to $300 billion, and suppose its steady-state level of capital is 1o its pleasant surprise, the economy receives a generous gift of foreign aru in the form of $100 billion worth of capital (electric power plants, machine tools, etc.). (a) Use the Solow diagram, other graphs, and the mathematics of the Solow model to explain what happens to the economy, both immediately and over time. By what proportion...
7) An invention that raises the future marginal product of capital in a closed economy) would...
7) An invention that raises the future marginal product of capital in a closed economy) would cause an increase in desired investment, which would cause the investment curve to shift to the and would cause the real interest rate to A) right; increase B) right; decrease C) left: increase D) left: decrease 8) Over the past year, output grew 4%, capital grew 2%, and labor grew 1%. If the elasticities of output with respect to capital and labor are 0.3...
A closed economy can be described by the long-run classical model: Y = 2KαL1–α C =...
A closed economy can be described by the long-run classical model: Y = 2KαL1–α C = 18500 + 0.75(Y – T) – 800r I(r) = 11000 – 1200r Note: r represents the real interest rate and is measured in percentage points (for example, if we find r = 10, then r is interpreted as being equal to 10%). Keep your answer to 4 decimal places if needed. Assume that there are two factors of production, capital (K) and labour (L),...
Consider the Solow growth model with depreciation rate and population growth rate n. The equation of...
Consider the Solow growth model with depreciation rate and population growth rate n. The equation of motion for the capital stock and the per worker production function in this economy are given by: Ak= s(f(k) - (8 + n) k y= f(k) = k1/4 a). Suppose adoption of modern birth control methods in a developing country causes the population growth rate to decrease. What happens in the main Solow diagram: what curve(s) shin, what happens to the steady- state level...
Consider an economy that follows the dynamic as in the Solow model developed in class, with...
Consider an economy that follows the dynamic as in the Solow model developed in class, with constant L. Suppose a country enacts a tax policy that discourages investment, and the policy reduces the investment rate immediately and permanently from s to s1. Assuming the economy starts in its initial steady state, use the Solow model to explain what happens to the economy over time and in the long run. Draw a graph showing how output evolves over time (put ????...
Refer to the figure above. Suppose the economy is currently in steady state. Furthermore, suppose the...
Refer to the figure above. Suppose the economy is currently in steady state. Furthermore, suppose the current savings rate (the one depicted in the figure) is higher than the golden rule savings rate. Which of the following statements is correct? To maximize steady state consumption per capita, the economy should aim for a steady state where capital per effective worker is less than D To maximize steady state consumption per capita, the economy should aim for a steady state where...
page 3 3. a. Given that a country at steady state engages in a cross border war with its neighbour and suffers significant infrastructure damage, illustrate and explain what will happen to the country's capital stock and output per worker if it maintains its 5 marks saving rate post-war. b. Given the scenario above, illustrate and explain what will happen to the country's capital stock and output per worker if it increases its saving rate after 10 years. 5 marks...
5. Foreign aid: Consider a Solow economy that begins with a cap to $300 billion, and suppose its steady-state level of capital is 1o its pleasant surprise, the economy receives a generous gift of foreign aru in the form of $100 billion worth of capital (electric power plants, machine tools, etc.). (a) Use the Solow diagram, other graphs, and the mathematics of the Solow model to explain what happens to the economy, both immediately and over time. By what proportion...
7) An invention that raises the future marginal product of capital in a closed economy) would cause an increase in desired investment, which would cause the investment curve to shift to the and would cause the real interest rate to A) right; increase B) right; decrease C) left: increase D) left: decrease 8) Over the past year, output grew 4%, capital grew 2%, and labor grew 1%. If the elasticities of output with respect to capital and labor are 0.3...
Consider the Solow growth model with depreciation rate and population growth rate n. The equation of motion for the capital stock and the per worker production function in this economy are given by: Ak= s(f(k) - (8 + n) k y= f(k) = k1/4 a). Suppose adoption of modern birth control methods in a developing country causes the population growth rate to decrease. What happens in the main Solow diagram: what curve(s) shin, what happens to the steady- state level...
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