Suppose output is produced according to the production function

Y=K[(1-u)L]1-

where K is capital, L is the labour force, and u is the natural rate of unemployment.

The national savings rate is s , and the capital depreciation rate is .

Express output per worker (y=Y/L) as a function of capital per worker (k=K/L) and the natural rate of unemployment (u ). [2]

Write an equation that describes the steady state of this economy. Show this steady state equilibrium in a diagram like in the standard Solow model. [4]

If the government implements a policy that reduces the natural rate of unemployment, using the graph you drew in part (b), describes how this change affects output both immediately and over time. Is the steady-state effect on output larger or smaller than the immediate effect? Explain. [4]