Question
2. The Corona virus pandemic is still a concern. Even though total death counts due to the disease are far from being final, we will
2. The Corona virus pandemic is still a concern. Even though total death counts due to the disease are far from being final, we will discuss some of the potential implications from the perspective of the Solow model. Assume that the pandemic only affects N once, that is there is no lasting change in population growth, and nothing else changes. The economy is otherwise
described by the simple Solow model.
(a) (10 points) Think about what the effect on N will be during the pandemic - once again assumes that this is a single shock, not something that happens gradually over time.llustrate graphically the effects of this shock. Draw the production function, investment function and depreciation function - all in per-worker terms. Show the initial steady state, include the shock to the economy and illustrate the movement of the economy as it adjusts to the long-run equilibrium. Make sure to label each axis, curve and equilibrium outcome clearly. Briefly explain in words.
(b) (4 points) Explain what happens to the marginal product of capital immediately following
the shock and over time, in the adjustment to the long-run equilibrium.
(c) (6 points) What will happen to standards of living in this economy? Assume that standards of living can be measured as output per worker. Draw a graph showing the standards of living over time, including the steady state prior to the shock, the effect of the shock and the transition to the long ron. Explain briefly
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