2. SHORT ANSWERS (1) Describe the Solow's Productivity Paradox. Following the discussion in Lecture 2, how can we apply the Solow's Productivity Paradox to the relationship between Artificial Intelligence and economic development? (2) Explain the concept of The Golden Rule of savings in the context of the Solow Model. Describe the trade-offs involved. (3) Assume the following capital accumulation equation K, , = 1 1/2 + (1 - 6) K,, where I, = Y, = $AKaNI . A given amount of investment /, generates less new capital (adjustment costs). Obtain the new TD equation and find the steady state value of capital per-capita (k+) assuming N, = N., 1 = N for every 1. Explain the difference, in terms of economic intuition, between this formula and the one studied in lectures. (4) Figure 1 shows the evolution of GDP per-capita and the saving rate of Japan. Use the Augmented Solow model and the historical events affecting Japan to describe the evolution of these variables, in isolation and together. GDP pc and saving rate Japan 100 Saving rate Real GDP 1860 1875 1890 1905 1920 1935 1950 1965 1980 1995 2010 2025 Year Real GDP per-capita Saving rate FIGURE 1. Japan: GDP per-capita and s (5) In the RBA lecture, we saw that unemployed and low liquidity workers are more likely to be financial distress and cut consumption spending. The guest lecture also indicated that expected job loss probabilities rose substantially. Discuss how the basic or Augmented Solow growth model can make sense of these facts during the COVID-19 crisis. Recall that the household "decision" is driven by ( = (1 - s)Y where s is the saving/investment rate and Y = AF(K, N) is total output. What else would the model need to better tackle these issues