hi, I posted questions in document. TY

Document Preview: 1. Suppose a country enacts a tax...

Question

hi, I posted questions in document. TY
	
Document Preview: 1. Suppose a country enacts a tax policy that discourages investment: suppose the policy reduces the investment rate immediately and permanently from s bar to s’. Assuming the economy starts in its initial steady state, use the Solow model to explain what happens to the economy over time and in the long run. Draw a graph showing how output evolves over time (put Yt on the vertical axis with a ratio scale, and time on the horizontal axis), and explain what happens to economic growth over time.2. Suppose the level of TFP in an economy rises permanently from A to A'.(a) Assuming the economy starts in its initial steady state, use the Solow model to explain what happens to the economy over time and in the long run.(b) Draw a graph showing how output evolves over time, and explain what happens to the level and growth rate of per capita income.(c) Suppose that A grew at a constant rate, instead of being constant. Explain in words what you think would happen to GDP over time.(d) How is the response of the economy to an increase in TFP different from the economy’s response to an increase in the investment rate?3. (a) Use the production function in equation (Yt=AKt1/3L2/3) and the rules for computing growth rates: g=(yty0)1/t-1 to write the growth rate of per capita GDP as a function of the growth rate of the capital stock. (Hint: Because the labor force is constant, the growth rates of GDP and per capita GDP are the same.)(b) Combine this result with the last equation in K*=(sAd)3/2L to get a solution for the growth rate of per capita GDP as a function of the current level of capital Kt. Be sure to write your answer in terms of Kt and parameters of the model only. 4. The table below reports per capita GDP and capital per person in the year 2007 for 10 countries. Your task is to fill in the missing columns of the table.(a) Given the values in columns 1 and 2, fill in columns 3 and 4. That is, compute per capita GDP and capital per person relative to the U.S....

Robert · Accepted Answer

Answer 1. 
If the investment rate or the saving rate decreases because of change in tax policy of the 
country, then it reduces the steady state level of capital per worker and output per worker. It is 
assumed that economy begins with saving rate  ̅ and steady state capital per worker of k1. 
When the saving rate decreases to  ̅’,the steady state gets disturbed as at his level of capital 
per worker the depreciation rate is higher than the investment rate, so the capital stock will fall 
gradually, and this goes on till the economy reaches a new steady state ,with capital per worker 
k0, where amount of investment offsets amount of depreciation.  
Fig 1. 
It must be noted that a low investment rate settles the economy at low steady state capital 
stock and output. The steady state level of output per worker falls from y1 to y0, but the 
aggregate output grows at a constant rate n (rate of population growth) both before and after 
the fall in investment rate.
Fig 2. Output per worker evolves to reach lower steady state leve
Fig 3. Aggregate output grows at constant rate n before and after fall in investment rate 
A lower investment rate only temporarily slows down growth. A fall in investment rate has only 
a level effect, wherein it reduces the level of steady state per worker capital and output. It does 
not have a growth effect, as the economy maintains a low capital stock and low level of output 
but it will not maintain a slow growth rate, aggregate output will keep growing at the the same 
growth rate n.  
Answer 2. 
a)  = A f(k) 
If the TFP increases from A to A’, then the output per worker curve shifts upward. The 
investment curve (sAf(k))  also shifts up. Then at the initial steady state level of capital per 
worker, k0, the amount of investment exceeds the amount of depreciation, so the capital stock 
increases up till the new steady state level of capital per worker, k1. This also raises the level of 
per worker output level in steady state from y0 to y1. So, the increase in TFP leads to higher 
capital stock and higher output per worker.
Fig 4. Increase in TFP from A to A’ 
b) It must be noted that when there is an increase in TFP (which is constant and does not grow 
over time) it produces only level effect where it raises the level of steady state per worker 
output. It does not have any growth effect since even after this increase in TFP the aggregate 
output grows at the constant rate of population growth, n.

hi, I posted questions in document. TY Document Preview: 1. Suppose a country enacts a tax policy that discourages investment: suppose the policy reduces the investment rate immediately and...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment