Unformatted text preview: these funds aside and lets it grow at the rate of interest. However, it does not increase its spending or change its behavior in any other way. This government will retire in 2 or 6 years and does not want to leave any funds to Democrats. Therefore any savings it has will be paid back to Joe. What happens to his savings? Does it matter when the government retires? Savings go down by 45.000 dollars. It does not matter when the government retires. This is a case in which Ricardian Equivalence holds . 3. In the Solow model, suppose that the marginal product of capital increases for each quantity of the capital input, given the labor input. a. Show the effects of this on the aggregate production function. Production function of the worker goes up . Aggregate production function goes up for any level of capital and labor....
View Full Document
This note was uploaded on 10/12/2008 for the course ECON 314 taught by Professor Bar during the Fall '08 term at Cornell.
- Fall '08