Extra credit_solution

Extra credit_solution - was growing more quickly than its...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Extra credit In the years before Worlds War I, the Myopia economy grew by 4% per year even though its labor force was growing by only 2% per year. During World War I, a substantial number of soldiers were killed. Usually the soldiers were young men with limited work experience in a country where job skills rise with age. Because most of the fighting during the war occurred in the countryside, there was very little damage to the Myopia’s capital stock. The war ended in 1918. In 1921, the Myopia government raised income tax rates. Based only on this information, use a Solow Growth Model diagram to clearly show (1) where the Myopia economy was before World War I and (2) what effects these events would have on Myopia’s level of income-per-worker during the 1920s (i.e., from 1920 to 1929). Be sure to clearly identify the final steady state.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Economic explanation Myopia’s steady state before World War I was at A. Because the economy
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: was growing more quickly than its labor force in the decade before the war, the economy was below its steady state with K/L at K/L* and with Y/L at Y/ L*. First, a large number of young men were killed. For the post-war period, this would be a decline in L (compared to the pre-war period). Consequently, the K/L ratio would rise to K/L and Y/L would increase along the production function to Y/L. At the same time, the skills level in the economy would increase. This would shift the production and saving functions higher because this can be represented by greater technology, A. This would create a new steady state at B. Finally, the Myopia government raised taxes to pay for the war damage and the debts incurred to fight the war. This increases government saving and the saving function shifts higher. This would create a new steady state at C. This is the final steady state to which the economy will eventually move....
View Full Document

Page1 / 5

Extra credit_solution - was growing more quickly than its...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online