Lets compare the U. economy in 1994 to the current U. economy. Ignoring population growth, the two major changes between 1994 and 2014 are:

Lets compare the U.S. economy

in 1994 to the current U.S. economy. Ignoring population growth, the two major

changes between 1994 and 2014 are: (1) total factor productivity has permanently

increased (z and z0 both increase); and (2) the capital stock, K, has increased.

(a) Using the real intertemporal model we developed in class, show graphically how

these changes have a¤ected output, employment, real wages and the real interest

rate. What happens to consumption? Based on your answer to question 5(e),

what happens to investment?

(b) Show that it is possible that the real interest rate remains unchanged. Look briey

at gure 1.12 in the Williamson book. According to this chart, is it realistic for

real interest rates in a growing economy to show no long-term trend?