Question
2. Suppose that you have a standard Solow model. The central equation governing the dynamics of the level of capital is given by (5.18). In
2. Suppose that you have a standard Solow model. The central equation governing the dynamics of the level of capital is given by (5.18). In terms of capital per worker, the central equation is given by (5.19). The production function has the normal properties (a) Suppose that the economy initially sits in a steady state in terms of the capital stock per worker, k. Suppose that, at time t, the number of workers doubles (say, due to an influx of immigrants). The number of workers is expected to remain forever thereafter constant at this new higher level, ie. N N. Graphically analyze how this will impact the steady state capital stock per worker and the dynamics starting from initial capital stock an (b) Draw diagrams plotting out how capital, output, and the real wage ought to respond dynamically to the permanent increase in the workforce.
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