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University of California, Davis ECN 101 - FALL 2015 Problem Set 2 Due Date: Thursday October 22 Problem 1: Write each production function given below...
PS2-ECN101
Problem 4: Suppose a country enacts a tax policy that discourages investment. As a result, the value of the parameter s ̄ now goes to a smaller value s ̄′.
a) Assuming that the economy starts at its initial steady state, use the Solow model to explain what happens to the economy (after the change of s ̄) over time and in the long run.
b) Draw a graph showing how output evolves over time (put Yt on the vertical axis and time on the horizontal axis). What happens to economic growth over time?
Problem 5: Suppose the level of TFP in an economy rises permanently from A ̄ to A ̄ ′ .
a) Assume that the economy starts at the initial steady state. Use the Solow model to expalin what happens to this economy (after the change of TFP) over time and in the long run.
b) Draw a graph showing how output evolves over time, and explain what happens to per capita income.
c) How is the response of the economy to the increase in TFP different from the economy’s response to an increase in the investment rate (like the one of Problem 4 above)? (Hint: Think about what happens to consumption)
Problem 6: In class we pointed out that, in the baseline Solow model, the variables K∗, Y ∗ remain constant in the long-run (that is, there is no long run growth since the economy settles at the steady-state).
a) Verify that the varibles y∗, C∗, c∗ are also constant in the long-run.1
b) Now suppose that everything in the Solow model remains the same excpet one assumption: labor supply is not constant over time any more, but assume that it grows at a constant rate per period. Intuitively (no need to write down any equations), will the variables K∗, Y ∗, y∗, C∗, c∗ still reach a long run steady state?
