Question

Suppose that a closed economy is in a steady state equilibrium in the long-run. If there is a decrease in the depreciation rate of this economy, discuss what will happen to the steady state equilibrium, output per worker and capital per worker in this economy. Graphically show and explain the developments by clearly labeling your graphs.

Answer #1

The initial steady state occurs at point E where the investment curve s*f(k) intersects the upward sloping depreciation line at point E. The steady state output and capital per worker are k* and y*.

A decrease in the depreciation rate causes an inward movement of the depreciation line. It cuts the investment curve at point E1. The new steady state output and capital per worker are y1 and k1*

The capital stock increases by transition dynamics due to fall in the depreciation rate.

S, both y* and k* increases to a new level.

Our closed economy starts off in steady state. Suppose it is
suddenly hit with an outbreak mad bat disease. This disease is
caught by a large percentage of the population and unfortunately
some people die. Another result there is a permanent decline in
fertility rates (as described by the number of children born per
adult female) and a permanent increase in government spending on
medical interventions such as testing, vaccines and other
interventions.
Using one Solow model diagram and words...

13. Suppose there is an increase in government spending in a
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none of the other answers is correct.
ambiguous effects on the neutral real interest rate
the nominal wage to rise
no change in the neutral real interest rate
the neutral real interest rate to rise
14. Suppose the economy is initially in the steady state.
According to Solow model without technological progress, an
increase in the depreciation rate (δ)...

Suppose that the economy is initially in steady state and that some
of the nation’s capital stock is destroyed because of a natural
disaster or a war.
A. Determine the long-run effects of this on the quantity of
capital per worker and on output per worker.
B. In the short run, does aggregate output grow at a rate
higher or lower than the growth rate of the labour force
C. After world war 2 , growth in real GDP in...

Consider a closed-economy IS-LM model. Assume
initially the economy is at medium run
equilibrium. Discuss with the help of graphs the effects
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rates and price level in the short run as well as in the
medium run. Be sure to explain how the economy transitions from
short run to the medium run.

Suppose that the economy is initially in a steady state and that
some of the nation’s capital stock is destroyed because of the
natural disaster or a war.
(a) (10 points) Determine the long-run effects of this on the
quantity of capital per worker, output per worker, and their growth
rates.
(b) (10 points) In the short run, does the aggregate output grow
at a rate higher or lower than the growth rate of the labor
force?
(c) (5 points)...

Consider the closed-economy model.
(a) Suppose the economy is initially in long-run equilibrium
with Y = Y¯ , r = ¯r, and P = P1. Draw IS-LM and AD-AS diagrams
showing this equilibrium.
(b) Suppose the economy is then hit by an adverse supply shock,
which causes P1 to jump up to P2 > P1. Using Keynesian cross and
money market diagrams, explain what will happen to the IS and LM
curves in the short run as a result of...

2. The Solow-Swan Model
a) Consider an economy that is initially in a steady state
equilibrium. Assume that in this equilibrium it has a saving rate
of 50 per cent and a depreciation rate of 2 per cent. Further
assume that the population is constant and that the level of output
produced can be represented by the following production function: Y
= AKαL 1−α where A = 1 and α = 0.5. Use the Solow-Swan model to
determine the level...

A closed economy (NX = 0) without government (G = T = 0) has a
production function Y = K^1/4 ^L 3/4 . Capital depreciates at a
rate of 3 percent per year. Workers spend 76 percent of their
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available for production next year. Assume that capital per worker
is 5.0625 at the beginning of 2017 and the number of workers stays
the same each year.
(a) Find...

Use the Solow model to solve. Suppose, you are the chief
economic advisor to a small African country with an aggregate per
capita production function
of y=2k1/2. Population grows at a
rate of 1%. The savings rate is 12%, and the rate of depreciation
is 5%.
(a) On a graph, show the output, break-even investment, and
savings functions for this economy (as a function of capital per
worker). Denote steady-state capital per worker k* and
steady-state output per worker y*. Label...

Suppose the economy is currently in both short-run and long-run
equilibrium at the equilibrium point indicated on the graph as
"E1". Also suppose that short-run aggregate supply curve is in the
very short run where prices are fixed.
a. Using the infinite line tool , draw both the short run and
long run aggregate supply curves that must exist in order for E1 to
be the equilibrium. Label these "SRAS" and "LRAS",
respectively.
b. Using the 3-pt curve tool ,...

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