a06-part2 - 10 out of 18 5- Consider an economy with the...

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Unformatted text preview: 10 out of 18 5- Consider an economy with the production function: Y= 2K0”6 (AN)°'4 Suppose, A, the productivity of labor (technological progress), rises at 3% per year. Labor force, N, grows at 2% a year, depreciation rate is 7%, and saving rate is 50%. (Total 25 points) a)- Derive the per effective worker production function. b)- Write the dynamic equation of capital accumulation (fundamental Solow equation) for this economy, in terms of per effective worker variables. c)- Draw a well-marked graph with all curves, which shows the steady state equilibrium of the economy. Calculate the steady state per effective worker capital, output and consumption. d)— What are the growth rates of per effective worker capital, and output in steady state? Why? e)- What are the growth rate of per worker capital, and output in steady state? Why? 1)- What are the growth rates of total capital, and output in steady state? Why? g)- Find the golden rule per effective worker capital, per effective worker output, and saving rate. Find the maximum possible per effective worker consumption in this economy. h)— Starting from part (c), suppose the saving rate increases. By drawing a new graph show how the steady state variables change. (Only a complete graph and one sentence explanation) i)- While the economy in the steady state equilibrium, suppose a natural disaster destroys only part of the capital stock. By drawing a new graph show how the steady state variables change. (Only a complete graph and one sentence explanation) j)- Starting from part (c), suppose the technological growth rate increases. By drawing a new graph show how the steady state variables change. Are people better off? (Only a complete graph and a few sentences of explanation) You can use the back of this page for your answers 11 outof 18 12 out of 18 You can use this page and its back for your answers 13 out of 18 14 out of 18 6- Suppose an economy can be characterized by the following equations: (Total 25 points) Okun’s law: ut — ut.1 = — 0.05 (th — 4%) Phillips curve: at — me = — 10 (ut — 7%) Aggregate Demand: gyt =gm — nt Currently the unemployment rate is 7% (ut = 7%), and the inflation rate is 20% (1t:= 20%). The government authorities have planned to reduce the inflation rate to 2%, by reducing the grth rate of money supply to 6% a year, starting next year (gm =6%). a)- What are the natural rate of unemployment, and non-accelerating inflation rate of unemployment (NAIRU) for this economy? (1 point) Combine aggregate demand and Okun’s law, to get one equation. Considering this equation and the Phillips curve, answer following questions. b)- Suppose people do not believe government in its disinflationary policies. Therefore they form their expected inflation as: me = 1m. Find the unemployment rate, inflation rate, and output grth rate for years 1, 2 (i.e. um, um, gy m, 11 H2, 1cm, gyt+2). Calculate the sacrifice ratio after 2 years of disinflationary policy. (10 points) c)- In this part, assume that half the people do not believe government, while the rest believe that the inflation rate would be 2%. Find the unemployment rate, inflation rate, and output grth rate for years 1, 2 (i.e. um, 7cm, gym, um, um, gy H2). Calculate the sacrifice ratio after 2 years of disinflationary policy. (7 points) d)- In this part, assume that everybody believes that the inflation rate would be 2%. Using the above relations find the unemployment rate, inflation rate, and output grth rate for years 1. (i.e. u m, at“, gy m). How much is the sacrifice ratio in this case. (4 points) e)- Using your results in parts (b) to (d), explain why it is believed that the disinflationary policies can be costly for the economy, and how credibility of the policies can affect the size of the cost. (3 points) You can use the back of this page for your answers 15 out of 18 16 out of 18 You can use this page and its back for your answers 17 out of 18 18 out of 18 ...
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This note was uploaded on 04/10/2010 for the course ECO ECO202 taught by Professor Masoudanjamshoa during the Spring '10 term at University of Toronto.

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a06-part2 - 10 out of 18 5- Consider an economy with the...

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