Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A closed economy has a constant return to scale production technology as following : Y = zF(K, N), where Y is the aggregate output of

A closed economy has a constant return to scale production technology as following : Y = zF(K, N), where Y is the aggregate output of consumption goods, z is the level of productivity, K denotes aggregate capital stocks, and N is the labor size. The capital stock accumulation function is: K' = (1 - 0)K+1 where K' represents the aggregate capital stock of tomorrow, K denotes the aggregate capital stock of today, 8 is the depreciation rate of capital, and I is today's aggregate investment. The rate of growth in the population equals to n which is a constant over time. The government purchases G units of consumption goods in the current period, where G = gN and g is a positive constant. The government finances its purchases through lump-sum taxes on consumers, where T denotes total taxes, and the government balances its budget each period, so that G=T. consumers consume a constant fraction of disposable income. i.e. C = (1-3)(Y-T), where s is the saving rate and C is the aggregate consumption, with 0 < s < 1 and C > 0.

(b) Suppose 0 < T< Y and Y = zF(K,N) = zk.

i. Derive the capital/labor ratio of tomorrow as a function capital/labor ratio of today.

ii. Under what circumstances, there will be a steady state.

iii. Assume this country is in the steady state before an exogenous shock happens. Now, s, saving rate, permanently increases, graphically and intuitively explain the short run change in k (capital/labor ratio), i (investment/capital ratio), c (consumption/labor ratio), and long run as well.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Capitalist Political Economy Thinkers And Theories

Authors: Heather Whiteside

1st Edition

0429888031, 9780429888038

More Books

Students also viewed these Economics questions