Suppose the economy of an island behaves as the Solow model (Y=AK1/2L1/2), version 1.0 (constant population). Suppose that the productivity parameter is A=90, the depreciation rate is d=1/10, the savings (investment) rate is s=0.10, and the labor force is equal to 2 million (and constant over time). 1-Due to climate change, from 2011 onward, every year the island is hit by hurricanes of increasing force that destroy capital. As a result, the depreciation rate doubles. What will be the new long-run (steady state) value for income per worker (Y/L)? Pick the closest value. Also label the new steady-state GDP as point C in the diagram. Between 75 and 85 None of the other options Between 4,500 and 5,200 Between 8,000 and 8,500 Between 44 and 49 2-In year 2021 investors recognize that the depreciation rate is higher than a decade earlier. They also recognize that the actual returns to their investments in physical capital over the previous decade have consistently fallen below their expectations. As a result, from 2021 onward they shift half of their new annual investment to a distant foreign country. How will this affect the Solow diagram and long-run GDP? Also label the new steady-state GDP as point D in the diagram. None of the other options. The Depreciation line curve will rotate up because of the reduction in the investment rate. Hence, steady-state GDP will fall The Depreciation line curve will rotate down because of the reduction in the investment rate. Hence, steady-state GDP will rise. The Investment curve will shift down because of the reduction in the investment rate. Hence, steady-state GDP will fall further. The Investment curve will shift up because of the reduction in the investment rate. Hence, steady-state GDP will fall further.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the economy of an island behaves as the Solow model (Y=AK1/2L1/2), version 1.0 (constant population). Suppose that the productivity parameter is A=90, the depreciation rate is d=1/10, the savings (investment) rate is s=0.10, and the labor force is equal to 2 million (and constant over time).

1-Due to climate change, from 2011 onward, every year the island is hit by hurricanes of increasing force that destroy capital. As a result, the depreciation rate doubles. What will be the new long-run (steady state) value for income per worker (Y/L)? Pick the closest value. Also label the new steady-state GDP as point C in the diagram.

Between 75 and 85
None of the other options
Between 4,500 and 5,200
Between 8,000 and 8,500
Between 44 and 49

2-In year 2021 investors recognize that the depreciation rate is higher than a decade earlier. They also recognize that the actual returns to their investments in physical capital over the previous decade have consistently fallen below their expectations. As a result, from 2021 onward they shift half of their new annual investment to a distant foreign country. How will this affect the Solow diagram and long-run GDP? Also label the new steady-state GDP as point D in the diagram.

None of the other options.
The Depreciation line curve will rotate up because of the reduction in the investment rate. Hence, steady-state GDP will fall
The Depreciation line curve will rotate down because of the reduction in the investment rate. Hence, steady-state GDP will rise.
The Investment curve will shift down because of the reduction in the investment rate. Hence, steady-state GDP will fall further.
The Investment curve will shift up because of the reduction in the investment rate. Hence, steady-state GDP will fall further.

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