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HW6_Ch5_Key - Name Section Number Recitation Leader's Name...

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Name: ____________________________________ Section Number: ____ Recitation Leader’s Name: _____________________________ Homework 6, Due March 26 at the beginning of class The online portion of this Homework is worth 1o points. 1. Analyze the effects of the following events on the equilibrium values of the real wage, employment, output, the real interest rate, desired investment, desired saving and desired consumption. Your analysis should include appropriate graphs and a verbal explanation. a. A natural disaster destroys a significant amount of the nation’s capital stock. b. A new innovation promises to increase the future marginal product of capital. (Assume that current desired consumption is unaffected by the increase in future income that would naturally follow from increased productivity.) /10 /10 Y N r S d & I d N w Y N r S d & I d N w PF ND NS Y1 w1 N1 PF2 ND2 PF ND NS Y1 w1 N1 N2 w2 Y2 I d S d S d 1 =I d 1 r1 S d 2 S d 2=I d 2 r2 I d S d S d 1 =I d 1 r1 I d 2 S d 12=I d 2 r2 A decrease in the capital stock will decrease the production function and cause the labor demand function to shift to the left. This causes a decrease in Y, a decrease in w, and a decrease in N. The decrease in Y causes a decrease in desired savings. This causes an increase in real interest rate as well as a decrease in the level of desired savings and investment and in the level of desired consumption. We also accepted
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