Our closed economy has a production function Y = A•F(K,LxE), where Y, K, L, E & A all have their usual meanings as per our lectures & course textbook. Also, this production function exhibits all the usual mathematical/economic properties we usually assume: positive marginal products, diminishing marginal products, complementarity between K & (LxE), and constant returns to scale. The aggregate consumption function depends negatively on the real interest rate, the government budget is balanced initially & the economy is in both a long-run equilibrium and steady state initially. The population growth rate is 2% per year, capital depreciates at a rate of 3% per year, the saving rate is 25% and technology is constant. Suppose the level of labour effectiveness (E) suddenly permanently rises by 10%. a) Use the long-run classical model to determine the qualitative impact of this shock on the long-run equilibrium levels of real output, consumption, investment, real interest rate, real wage & real rental price of capital. Support your answer with three diagrams one for the market for loanable funds, one for the labour market & one for the rental market for capital. b) Use the Solow model to determine the qualitative impact of this shock on the levels of capital, output, consumption & investment all in per effective worker terms in the long-run. Are your answers in part b consistent with those you found in a long-term classical model? Explain why or why not. Use the Solow model to determine the qualitative impact of this shock on the levels of capital, output, consumption & investment all in per effective worker terms in the new steady state that results following this shock. Support your answer with one Solow model diagram.
Our closed economy has a production function Y = A•F(K,LxE), where Y, K, L, E & A all have their usual meanings as per our lectures & course textbook. Also, this production function exhibits all the usual mathematical/economic properties we usually assume: positive marginal products, diminishing marginal products, complementarity between K & (LxE), and constant returns to scale. The aggregate consumption function depends negatively on the real interest rate, the government budget is balanced initially & the economy is in both a long-run equilibrium and steady state initially. The population growth rate is 2% per year, capital
a) Use the long-run classical model to determine the qualitative impact of this shock on the long-run equilibrium levels of real output, consumption, investment, real interest rate, real wage & real rental price of capital. Support your answer with three diagrams one for the market for loanable funds, one for the labour market & one for the rental market for capital.
b) Use the Solow model to determine the qualitative impact of this shock on the levels of capital, output, consumption & investment all in per effective worker terms in the long-run. Are your answers in part b consistent with those you found in a long-term classical model? Explain why or why not. Use the Solow model to determine the qualitative impact of this shock on the levels of capital, output, consumption & investment all in per effective worker terms in the new steady state that results following this shock. Support your answer with one Solow model diagram.
Only answer part b) please
I don't understand why you are rejecting the part b) saying that it is a written question, it is clearly a Solow model diagram question. This is a textbook question that I have no answer to.
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