However it is again noted that the implications of an

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However, it is again noted that the implications of an increase in foreign interest rates should be taken into consideration given that prices are flexible, smooth, and that supply will equal demand. Then in the markdown cell below the code cell, after the "TH8" prompt, explain to somebody who has never taken this course what the model predictions of the effect of the dependence of the relative price of capital goods on the efficiency of labor are what they are, why these predictions are what they are, and under what circumstances one should take these model predictions as a reasonable set of forecasts When looking at the equation of the relative price of capital goods (pk) given efficiency of labor (E), we notice that if eta equals 0 then the relative price of capital goods remains constant at 1, regardless of how other parameters change throughout time. However, looking at the equation for the relative price of capital goods with eta equal to 1, as the efficiency of labor grows from year 0 to year 100, the relative price of capital goods decreases proportionally. This falling in the
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relative price of capital goods has the same effect on total investment as an increasing saving rate. From the Solow growth model, a higher share of national product devoted to saving and gross investment (i.e. a higher savings rate) will lead to a higher balanced growth capital output ratio. The same applies to a low relative price of capital goods. As the price of capital goods decreases, in the long run the economies capital intensity will increase proportionally. As capital intensity increases, output per labor will increase due to the diffusion of useful technology throughout the economy. In today’s economy this increase in capital to output due to a decrease in relative price of capital goods is seen as a higher ratio of information capital such as computer and communication goods rather than steel mills or printing presses. Going back to the results of the exercise, when eta is 0 the relative price of capital goods is constant as the efficiency of labor, leading to a low output per worker in comparison to when eta is 1 and the relative price of capital goods decreases as the efficiency labor increases; we see the output per worker increase five-fold when eta switches from 0 to 1. In order to see the predictions of this model as a reasonable set of forecasts, we must assume that the relative price of capital goods
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