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1. Consider how unemployment would ali'ect the Solow model. Suppose that output is produced according to the production function Y = KC: [(1 _ ]L]ln1n

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1. Consider how unemployment would ali'ect the Solow model. Suppose that output is produced according to the production function Y = KC: [(1 _ ]L]ln1n where K is capital. L is the labour force, and n is the natural rate of unemployment. The national saving rate is s, the labour force grows at rate n, and capital depreciates at rate ti. a. Express output per worker [y = Yij as a function of capital per worker [in = XIII} and the natural rate of unemployment (is). b. Write and equation that describes the steady-state of this economy. illustrate the steady-state graphically for the standard Solow model. c. Suppose that some change in government policy reduces the natural rate of unemployment. Using the graph in part {b}, describe how this change affects output both immediately and over time. Is the steady-state effect on output larger or smaller than the immediate effect? Explain

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