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# Macroeconomics-Suppose a country enacts a tax policy that discourages investment: suppose the policy reduces the ...

Question # 00061150
Subject: Economics
Due on: 09/28/2015
Posted On: 04/14/2015 01:50 AM

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1. Suppose a country enacts a tax policy that discourages investment: suppose the policy reduces the investment rate immediately and permanently from.png"> bar to.png">’. 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.png"> 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.png"> to.png">.

(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.png"> 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 (.png">) and the rules for computing growth rates:.png"> 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.png"> to get a solution for the growth rate of per capita GDP as a function of the current level of capital.png">. Be sure to write your answer in terms of.png"> 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. values.

(b) in column 5, use the production model (with a capital exponent of 1/3) to compute predicted per capita GDP for each country relative to the United States, assuming there are no TFP differnces.

(c) In column 6, compute the level of TFP for each country that is needed to match up the model and the data. Comment on the general results you find.

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5. The Black Death. (Based on Jones, question 4.3). In the middle of the fourteenth century, an epidemic known as the Black Death killed about a third of Europe's population. While this was an enormous tragedy, over the next century wages are estimated to have been higher than before the Black Death.

(a) Use the production model to explain why wages might have been higher.

(b) Can you attach a number to your explanation? In the model, by how much would wages rise if 1/3 of the population died from disease?

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#### Macroeconomics-Suppose a country enacts a tax policy that discourages investment: suppose the policy reduces the ...

Tutorial # 00057076
Posted On: 04/14/2015 01:59 AM
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Preview: when xxxxx is xx increase in xxx (which is xxxxxxxx and xxxx xxx grow xxxx time) it xxxxxxxx only level xxxxxx where xx xxxxxx the xxxxx of steady xxxxx per worker xxxxxx It xxxx xxx have xxx growth effect xxxxx even after xxxx increase xx xxx the xxxxxxxxx output grows xx the constant xxxx of xxxxxxxxxx xxxxxxx n xxx per worker xxxxxx does not xxxx over xxxx x long xxxx rather settles xx the new xxxxxx state xxxxx xxx 5 xxxxxxxxx output pathc) xxxxxxx TFP was xxxxxxxx Now, xxx xxxxx at xxxxxxxx rate, say x This means xxxx the xxxxxxxxx xxxxxx will xxxx at constant xxxx (n + xx after xxxxxxxx xxxxxx state xxx per worker xxxxxx will grow xx constant xxxx x this xxx an important xxxxxx implication that xxx continuous xxxxxx xx per xxxxxx GDP technological xxxxxxxxxxx and advancement xxxx raise xxxxxxxxxxxx xx the xxxxxxx of production xx very important, xxxxx the xxxxxxxx xx investment xxxx is ineffective xx growth rate xx per xxxxxx xxx d) xxx increase in xxxxxxxxxx rate shifts xxx investment xxxxx xx (as xxxxxxxx in Fig xx but an xxxxxxxx in xxx xxxxx shifts xxx production function xx and then xx a xxxxxx xxx investment xxxxx shifts up xxx depicted in xxx 7) xx xxx be xxxxxxx that in xxxx the cases xxx changes xxx xxxx that xxx steady state xxxxxxx per worker xxxxxxxxx from xx xx k1 xxxx it can xx carefully observed xxxx in xxxx xx increase xx investment rate, xxxxx is.....
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