PS 2_BScII_2011 - Solved

PS 2_BScII_2011 - Solved - Lahore School of Economics...

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Lahore School of Economics Macroeconomics II BSc II Problem Set II – Suggested Solutions: Any queries can  be emailed or discussed in class 1. Consider how unemployment would affect the Solow growth model. Suppose that output  is produced according to the production function Y = K α [(1 – u)L] 1- α , where K is capital,  L is labor force and ‘u’ is natural rate of unemployment. The national saving rate is ‘s’,  the labor force grows at ‘n’ and capital depreciates at rate ‘ ’. δ a. Express output per worker (y = Y/L) as a function of capital per worker (k = K/L) and  the natural rate of unemployment. Describe the steady state of this economy.
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b. Suppose a government policy reduces the ‘u’. Describe how this change affects output  both immediately and over time. Is the steady state effect on output larger or smaller  than the immediate effect? Explain.
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2. Assume that China grows at a faster rate than US. Is China farther away from its Golden  rule level of savings and consumption? Explain if the income disparity across these two  regions would disappear over time? If China is growing at a higher rate then it is farther away from its Golden rule steady state
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This note was uploaded on 02/13/2012 for the course ECON 101 taught by Professor Malrani during the Spring '05 term at Bunker Hill.

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PS 2_BScII_2011 - Solved - Lahore School of Economics...

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