Assume the following production function: Y_t = AK_t^0.4L_t^0.6. The capital stock and output are measured in trillions of dollars, and the labor stock is measured in millions of people.

a) Using the value of output and the capital and labor stocks, calculate the Solow residual (productivity, A) and its growth rate for each period. Note: calculate growth rates for periods 2–6.

b) Plot the Solow residual (productivity) growth rate and the output growth rate for periods 2–6. Does this table constitute evidence in favor of real business cycle theory? Why or why not?

Transcribed Image Text:

Variable Capital (K) Labor (L) Output (Y) Productivity (A) Period 1 Period 2 Period 3 Period 4 1.1 1 1 32 10.0 1 33 10.6 32 11.6 32 10.8 Period 5 Period 6 0.95 32 10.4 1 32 10.8