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# PS 7 - My P Le Problem Set 7 1 a.As depreciation rate...

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My P. Le Problem Set 7 1. a.As depreciation rate increases, the depreciation per worker per year increases at any level of capital per worker. The (Depreciation per worker) line pivots upward. The economy as a whole has to spend more resources replacing the depreciated capital, leading to a lower steady state. The steady state moves to the left and K* goes down. Thus capital per worker (K/N) goes down. As capital per worker decreases, output per worker (Y/N) decreases. Because of decreasing returns to capital, the decrease in output per worker is smaller than the decrease in capital per worker. As output decreases, income decreases, thus saving decreases and S=I so I decreases. Investment per worker decreases. Consumption per worker also decreases. When depreciation rate increases, we observe the shift of the (Depreciation per worker) curve. Over time, the economy moves from Eo to E1 as K and Y decreases. During the adjustment, the decrease in s will cause negative growth in output >>> Y/N decreases >>> S/N decreases >>> K/N decreases >>> I decreases linearly >>> the gap between saving and depreciation narrows >>> Y decreases slower. When point E1 is reached, the rate of growth of Y = 0 when saving (investment) and depreciation are equal again. Rate of growth of Y/N is also 0.

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