HelpHW4 - f , s , n , or d , the steady state will be the...

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a. A terrorist attack destroys a portion of the nation’s capital stock. Assume that the economy begins (pre-attack) in the steady state. The destruction of a portion of the nation’s capital will reduce the capital-labor ratio to a level that is below the steady-state level. (We are assuming here that the population and labor force were not reduced significantly by the war.). We know that when the capital-labor ratio is below its steady-state level, the rate of saving (and therefore investment) will be greater than the rate required to replace worn out capital and equip new workers, so the capital labor ratio will be growing. This growth in the capital labor ratio will continue until the economy returns to the steady state. Since there was no change in
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Unformatted text preview: f , s , n , or d , the steady state will be the same as it was before the war. c. A discovery of massive new oil reserves leads to a permanent decrease in energy prices. A permanent decrease in energy prices permanently increases productivity, so f shifts up from f to f 1 . Since workers are more productive, the economy is able to maintain higher a level of capital per worker, so the steady state level of capital increases from k * to k * 1 . As a result, output per worker (and therefore consumption per worker) increases for two reasons: (1) increased capital per worker, and (2) increased productivity of capital and labor. k * Per capita investment k sf ( k ) ( n+d ) k k k * 1 k * Per capita investment k sf ( k ) ( n+d ) k sf 1 ( k )...
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