Consider the Diamond overlapping generations model from the lectures where the utility function is assumed to be of the logarithmic form and the production function is of the Cobb-Douglas form, written in an intensive form as y= kα, where k and y are (as usual) capital and output per unit of effective labour respectively. 0<α<1. Depreciation of capital is assumed to be zero. is the discount rate on future consumption vis-a-vis the current consumption of the typical household. The rate of population growth is 1% and the rate of technological growth is 2%. Assume that the economy is in an initial steady-state. Suppose now the population growth rate rises permanently to 2%.
Consider the Diamond overlapping generations model from the lectures where the utility function is assumed to be of the logarithmic form and the production function is of the Cobb-Douglas form, written in an intensive form as y= kα, where k and y are (as usual) capital and output per unit of effective labour respectively. 0<α<1.
Suppose now the population growth rate rises permanently to 2%.
What is the effect of this change on output per unit of effective labor and on interest rates in the economy? Explain your answer
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