2. Consider a country in which Y = 21 K2N, where K represents a composite of...

Transcribed Image Text:

2. Consider a country in which Y = 21 K2"N", where K represents a composite of both physical and human capital. Assume in this country the investment rate for physical capital is 25%, the investment rate for human capital is 13%, population grows at 2% per year, and depreciation of capital occurs at 8% per year. Use the H-Solow model. a. Compare the effectiveness of i) a 50% increase in the physical capital investment rate (to 37.5%), i) a 50% decline in the population growth rate (to 1%), and iii) a 10% increase in productivity (to 23.1). That is, for each, give the percent by which it increases long-run average income (4') and long-run average consumption (e'). b. How do these income and consumption effects compare to those of the Solow model (PS 2, problem 1)? c. In this numerical example, which of the policy changes i)-iii) has the greatest impact on long-run well-being (assuming each policy has zero costs)? 2. Consider a country in which Y = 21 K2"N", where K represents a composite of both physical and human capital. Assume in this country the investment rate for physical capital is 25%, the investment rate for human capital is 13%, population grows at 2% per year, and depreciation of capital occurs at 8% per year. Use the H-Solow model. a. Compare the effectiveness of i) a 50% increase in the physical capital investment rate (to 37.5%), i) a 50% decline in the population growth rate (to 1%), and iii) a 10% increase in productivity (to 23.1). That is, for each, give the percent by which it increases long-run average income (4') and long-run average consumption (e'). b. How do these income and consumption effects compare to those of the Solow model (PS 2, problem 1)? c. In this numerical example, which of the policy changes i)-iii) has the greatest impact on long-run well-being (assuming each policy has zero costs)?