ECON-UA 12 - Intermediate Macroeconomics Professor: Corina Boar TA: Andres Ghini Spring 2022 Problem Set 4 Due Friday, February 25 1 Understanding the experiments in the Solow growth model Remember that we reduced the Solow growth model to two equations Y = AKPLI- AKill = ah -K where A, s, 6, L are parameters whose changes we will analyze. We want to analyze what happens to the level of output (and other quantities) immediately after the change in parameters, and what is the total percentage change in the level of output from the original steady state to the new steady state. Question 1.1 What do the parameters A, s, 8, L and a represent? Question 1.2 What are the ranges of plausible values for these parameters? Question 1.3 Consider first the production function model Y = AKPLI- in isolation. We want to express the percentage change of output as a function of percentage changes of TFP, capital and labor inputs. Denote You'd the output before the change, and I'mew the output after the change. Notice that we define the rate of change (or percentage change) of output as Ynew Yald "=l+gy. Analogously, define the rate of change of A, K and L as gA, gx and gz, respectively. Express gy as a function of gA, gx and gz- Notice that you will obtain the same answer as we derived in the model of the production function in Chapter 4. Question 1.4 Imagine thef following experiments (each of them in isolation). Derive the result both for a general a as well as assuming o = 1/3