Econ2102S2_Tutorial_2s[1]

Time t 1 0 1 2 3 4 5 6 7 8 9 10 capital output

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Unformatted text preview: erent in Queensland than in the other states? Time t  ­1 0 1 2 3 4 5 6 7 8 9 10 Capital Output Investment Depreciation 4.00 2.00 0.40 0.40 1.00 1.00 0.20 0.10 1.10 1.05 0.21 0.11 1.20 1.10 0.22 0.12 1.30 1.14 0.23 0.13 1.40 1.18 0.24 0.14 1.49 1.22 0.24 0.15 1.59 1.26 0.25 0.16 1.68 1.30 0.26 0.17 1.77 1.33 0.27 0.18 1.86 1.36 0.27 0.19 1.95 1.40 0.28 0.19 Implied Growth Rate (%) Change in Capital 0.00 0.10 0.10 0.10 0.10 0.10 0.10 0.09 0.09 0.09 0.09 0.08  ­50.00 4.88 4.44 4.05 3.71 3.40 3.13 2.89 2.68 2.48 2.30 Output 2.50 2.00 1.50 1.00 0.50 0.00  ­1 0 1 2 3 4 5 6 7 8 9 10 After the initial decline in output, the implied growth rates are positive. The other states are assumed to be in steady state, so their implied growth rates are zero. Thus, the model predicts that Queensland will have relatively faster growth than the other states. Given the model parameters and the assumed 75% decline in the 3 capital stock, the growth rates in Queensland will be between 2-5 percentage points higher than in the other states. Treasury should not worry about lower growth rates in Queensland. The economic intuition is that the lower capital stock in Queensland means that the MPK of capital will be higher in Queensland. Thus, there will be more investment there, leading to higher growth. (f) What is predicted long-run consequence of the floods for economic activity in Queensland relative to the other states? (Hint: solve for the steady-state level of output per capita in Queensland vs. the other states. It should be the same. But does this mean that the floods have no economic costs?) The steady-state levels of output are unchanged (Y*=2) for all states. Thus, the longrun relative levels of output will be unchanged, despite the floods. This is analogous to the discussion about the impacts of war in the case study on p. 117 of the textbook. This does not, howev...
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This document was uploaded on 03/15/2014.

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