Consider a neoclassical, Solow-style economy. In this society, a severe version of the Great Stagnation exists...

 

Transcribed Image Text:

Consider a neoclassical, Solow-style economy. In this society, a severe version of the "Great Stagnation" exists and hence total factor productivity is forever fixed. We can ignore foreign trade, so treat the economy as closed for simplicity. Input markets for capital and labor are competitive and price-taking as usual. Population is growing at a positive constant rate forever. In this economy, the level of capital per worker starts off in the year 2045 far below its steady state. Answer the following questions about what will happen in this economy from the years 2046 to about 2066. The national savings rate, depreciation rate, and other key parameters don't change during the time period covered by this question. All questions of course are about real, not nominal values: a. What will happen to the rental rate of capital per unit of capital (r) over this period: Will it rise, fall, stay the same, or can't you tell with the information given? b. What will happen to the wage per worker (w) over this period? Will it rise, fall, stay the same, or can't you tell with the information given? c. What will happen to the marginal product of labor (MPL) over this period: Will it rise, fall, stay the same, or can't you tell with the information given? In each case of (a-c), give a very brief explanation for your reasoning. Finally, answer these questions, and briefly explain your answers: d. In the very long run-or steady state-what will the growth rate be of capital per worker? e. In the very long run-or steady state-what will the growth rate be of output (GDP) per worker? Consider a neoclassical, Solow-style economy. In this society, a severe version of the "Great Stagnation" exists and hence total factor productivity is forever fixed. We can ignore foreign trade, so treat the economy as closed for simplicity. Input markets for capital and labor are competitive and price-taking as usual. Population is growing at a positive constant rate forever. In this economy, the level of capital per worker starts off in the year 2045 far below its steady state. Answer the following questions about what will happen in this economy from the years 2046 to about 2066. The national savings rate, depreciation rate, and other key parameters don't change during the time period covered by this question. All questions of course are about real, not nominal values: a. What will happen to the rental rate of capital per unit of capital (r) over this period: Will it rise, fall, stay the same, or can't you tell with the information given? b. What will happen to the wage per worker (w) over this period? Will it rise, fall, stay the same, or can't you tell with the information given? c. What will happen to the marginal product of labor (MPL) over this period: Will it rise, fall, stay the same, or can't you tell with the information given? In each case of (a-c), give a very brief explanation for your reasoning. Finally, answer these questions, and briefly explain your answers: d. In the very long run-or steady state-what will the growth rate be of capital per worker? e. In the very long run-or steady state-what will the growth rate be of output (GDP) per worker?

Answer rating: 100% (QA)

a During this time the rental rate of capital per unit of capital r will increase The economy is not ... View the full answer