Question: I have two examples that boil down to one question: In Solow model and in long-run , then in what scenarios will steady state change
I have two examples that boil down to one question: In Solow model and in long-run, then in what scenarios will steady state change permanently?
Example of Unemployment Suppose the production function is Y=K[(1-u)L]1-, where u is the natural rate of unemployment. Here the saving rate is s, the labor force grows at rate n, and capital depreciates at rate d. If government conducts policy that reduces the unemployment rate u, how this change affects output both immediately and overtime?
Well, I compute that y=k(1-u)1-. The answer states that there is a jump immediately, and then Y permanently increase by capital accumulation.
Example of LaborSuppose the production function is Yjt=Kjt(AjtLjt)1-. Now suppose there is a one-time jump in the number of workers. How this change affects output per unit of effective labor immediately and in further condition?
Here the answer states that y=Y/AL will fall immediately, but in the long run, both k and y will move back to original steady state.
I wonder how to deal with this contradiction? I was told that the long-run steady state only changes when saving rate and depreciation change, but in the first example, the steady state changes when s and d remain the same.
Please help me!! Thank you very much.
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