
Sub part (a):
Steady state level of output.
Sub part (a):

Explanation of Solution
The steady state level of output is calculated as follows:
The steady state level of output is 200 units.
Concept introduction:
Sub part (b):
Solow diagram to show short run impact.
Sub part (b):

Explanation of Solution
Figure 1 depicts Solow diagram which shows the short run impact of a 21% increase in the amount of labor available.
In figure 1, the horizontal axis represents the capital (K) and the vertical axis represents the output (Y). The initial production function
Concept introduction:
Economic growth: The economic growth is the increase in the overall goods and services produced per head in the economy over a specific period of time.
Solow growth rate The Solow growth rate is the rate of economic growth with given flexible price, and the existing real factors of capita, labor and knowledge. The Solow growth rate is an economy’s potential growth rate.
Sub part (c):
Steady state level of output.
Sub part (c):

Explanation of Solution
The new steady state level of output is calculated as follows:
The new steady state level of output is 220 units.
Concept introduction:
Economic growth: The economic growth is the increase in the overall goods and services produced per head in the economy over a specific period of time.
Sub part (d):
The new steady state level of output in the diagram.
Sub part (d):

Explanation of Solution
The new steady state level of output is 220 units which is depicted in the figure 1.
Sub part (e):
Action to gain long lasting benefits from the increase in capital stock.
Sub part (e):

Explanation of Solution
The initial production function is algebraically represented as follows:
Squaring both sides,
And solving for K, we get
Substitute K into the steady-state condition
And solve for Y by multiplying L and dividing by
Similarly, the new production function can be algebraically represented as follows:
Substitute K into the steady-state condition
And solve for Y by multiplying L and dividing by
Equating (1) in (2) we get
Substituting the values in equation (3) we get
Further, the percentage change in the output is depicted as follows:
This implies the steady-state level of output will grow by 21% per cent in the long run.
Concept introduction:
Production function: It is the relationship between the inputs employed by a firm and the maximum output the firm can produce with those inputs.
Sub part (f):
Output per worker.
Sub part (f):

Explanation of Solution
The output per worker in the initial steady state is calculated as follows:
The output per worker in the initial steady state is 2 units per labor.
The output per worker in the short run is calculated as follows:
The output per worker in short run is 1.82 units per labor.
The output per worker in the initial steady state is calculated as follows:
The output per worker in the long run is 2 units per labor.
Sub part (g):
New immigration policy and its effect.
Sub part (g):

Explanation of Solution
The citizens of the country are neither made worse off nor better off in the long run by a new immigration policy. This is because the new long-run level of output per worker compare with the initial level of output per worker remains unchanged which is 2 units per labor. This is unlike the short run effect which has lower output per worker. In the long run, the steady output level is determined largely by the
Concept introduction:
Depreciation: Depreciation is the process of decreasing the value of an asset over time especially due to wear and tear.
Investment: The investment is the money invests in terms of assets and building by the individual for the future consumption and profit making.
Sub part (h):
New steady state level of capital.
Sub part (h):

Explanation of Solution
The new steady state level of capital is calculated as follows
We know
Also
Equating all these we get,
Substituting the values we get
Thus the new steady state level of capital is 484, so that
Want to see more full solutions like this?
Chapter 8 Solutions
EBK MODERN PRINCIPLES OF MICROECONOMICS
- Some people say that since inflation can be reduced in the long run without an increase in unemployment, we should reduce inflation to zero. Others believe that a steady rate of inflation at, say, 3 percent, should be our goal. What are the pros and cons of these two arguments? What, in your opinion, are good long-run goals for reducing inflation and unemployment?arrow_forwardExplain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope of the IS curve. Explain in words how and why the income and interest sensitivities of the demand for real balances affect the slope of the LM curve. According to the IS–LM model, what happens to the interest rate, income, consumption, and investment under the following circumstances?a. The central bank increases the money supply.b. The government increases government purchases.c. The government increases taxes.arrow_forwardSuppose that a person’s wealth is $50,000 and that her yearlyincome is $60,000. Also suppose that her money demand functionis given by Md = $Y10.35 - i2Derive the demand for bonds. Suppose the interest rate increases by 10 percentage points. What is the effect on her demand for bonds?b. What are the effects of an increase in income on her demand for money and her demand for bonds? Explain in wordsarrow_forward
- Imagine you are a world leader and you just viewed this presentation as part of the United Nations Sustainable Development Goal Meeting. Summarize your findings https://www.youtube.com/watch?v=v7WUpgPZzpIarrow_forwardPlease draw a standard Commercial Bank Balance Sheet and briefly explain each of the main components.arrow_forwardPlease draw the Federal Reserve System’s Balance Sheet and briefly explain each of the main components.arrow_forward
- 19. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. How does the Federal Reserve currently get the federal funds rate where they want it to be?arrow_forward18. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. Carefully compare and contrast fiscal policy and monetary policy.arrow_forward15. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. What are the common arguments for and against high levels of federal debt?arrow_forward
- 17. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. Explain the difference between present value and future value. Be sure to use and explain the mathematical formulas for both. How does one interpret these formulas?arrow_forward12. Give the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. Show and carefully explain the Taylor rule and all of its components, used as a monetary policy guide.arrow_forward20. In a paragraph, no bullet, points please answer the question and follow the instructions. Give only the solution: Use the Feynman technique throughout. Assume that you’re explaining the answer to someone who doesn’t know the topic at all. What is meant by the Federal Reserve’s new term “ample reserves”? What may be hidden in this new formulation by the Fed?arrow_forward
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education





