Now consider reunification. Let's think of it as a one-time migration of workers from East to West Germany. In the remainder of the problem, we will take the perspective of East Germany. 5. Use the phase diagram of the Solow model to trace the effects of the reunification, i.e. of a one-time decrease in the labor force of East Germany. Discuss the forces at work along the transition. 6. In three figures, sketch the evolution through time of capital per capita, investment per capita and (the logarithm of) aggregate output. Make sure your figures include the initial steady state (that is, some periods before the re-unification), the shock, several periods after the shock, and the final steady state.

Now consider reunification. Let's think of it as a one-time migration of workers from East to West Germany. In the remainder of the problem, we will take the perspective of East Germany. 5. Use the phase diagram of the Solow model to trace the effects of the reunification, i.e. of a one-time decrease in the labor force of East Germany. Discuss the forces at work along the transition. 6. In three figures, sketch the evolution through time of capital per capita, investment per capita and (the logarithm of) aggregate output. Make sure your figures include the initial steady state (that is, some periods before the re-unification), the shock, several periods after the shock, and the final steady state.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider a Solow economy that begins with capital stock equal to $200 billion, and suppose itssteady-state level of capital is $400 billion. Now suppose this economy receives a gift of foreign aidin the form of $100 billion worth of capital.(a) Use the Solow model to explain what happens to capital per worker, output per worker, andconsumption per worker, both immediately and over time in this economy. (b) Suppose instead of starting below its steady state, the economy begins in steady state withcapital equal to $400 billion. Answer part (a) for this case. (c) In this example, does foreign aid have a long-run effect on the welfare of poor countries?
Consider the model you developed in Question 1, where labor growth at a constant rate. Suppose that F(K, L) = K0.5 L0.5 with d = 0.1, s = 0.2, n = 0.01, and A = 1, and take a period to be a year. Question 2 Part a Determine capital per worker, income per capita, and consumption per capita in the steady state. Question 2 Part b Now, suppose that the economy is initially in the steady state that you calcu- lated in Part a. Then, s increases to 0.4 Question 2 Part b1 Determine capital per worker, income per capita, and consumption per capita in each of the 10 years following increase in the savings rate Question 2 Part b2 Determine capital per worker, income per capita, and consumption per capita in the new steady state. Question 2 Part b3 Discuss your results, in particular, comment on the speed of adjustment to the new steady state after the change in the savings rate, and the paths followed by capital per worker, income per capita, and consumption per capita.
Suppose a war destroys part of a nation's population but not its capital stock, (say on account of a neutron bomb being deployed). Use the Solow model without change to show the effect of this event on the country's total output technological and per capita output over time. Assume prior to this event the economy was on its steady state path.
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Consider the Solow model with a production function Y(t) = A*K(t)αL(t)1-α, Where A is a fixed technological parameter. Explicitly solve for the steady-state value of the per capita capital stock and per capita income. How do these values change in response to a rise in (a) the technological parameter A, (b) the rate of saving s, (c) α , (d) δ, the depreciation rate, and the population growth rate n?
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