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Solow model summarized by the following equations: ZK?L} dl O given, The law of motion for the capital-labor ratio, kt = Kt Lt, is
Solow model summarized by the following equations: ZK?L} dl O given, The law of motion for the capital-labor ratio, kt = Kt Lt, is kt = sZk? 2) (9 pt) Tiansition dynamics in the basic Solow model (1) Let the basic Solow model and the given parameter values be as in question 1: a = 0.5, s = 0.2, n = 0.02, d 0.08, Z 1. Suppose that at date T the economy is in its long-run equilibrium, and that the labor supply at date T is LT = 2000. a) An earthquake happens at date T and abruptly destroys one-quarter of the econ omy's capital stock. Calculate the equilibrium wage just before and just after the earthquake. Plot wt as a function of time, starting from date T. Show where the long-run wage is relative to what it was befre the earthquake: higher, lower or the same. If your time path has jumps or kinks at date T, please explain why. If not, why not. ( Hint: Derive the expression for the MP Lt torm the production function = ZK?L} and express MPLt through kt = ICt/Lt). b) Calculate the growth rate of output just after the earthquake ( Hint: use the law of motion (1) to calculate the growth rate of the capital-labor ratio, kt. Then use the expression for the per-worker production function Yt Lt = Zk? and growth rate rules to calculate gy,T). Plot the growth rate of output, gy,t, as a function of time, starting from date T. Show where the long-run growth rate of output is relative to what it was before the earthquake: higher, lower or the same. If your time path has jumps or kinks at date T, please explain why. If not, why not.
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