q3

Question 3 (10 marks) (a) Consider a simple version of the Romer growth model which contains the following four equations: AAr+1 = ZAtLat YIt = AWL\" Lyt + Lat = E where Z Zand Tare parameters. Assume the economy starts at t= 0 and that the initial (i.e. i=0) value of A, is 20 (a parameter). Provide an economic interpretation of each equation. (b) If 0 = 10, I = 100, 1: 0.4-, and z' = 0.001, what is the growth rate of knowledge in this economy? What is the growth rate of per capita output in this economy? lf A0 changes would this growth rate change as well? (c) Suppose there is an exogenous increase in l (the share of labour force working in the ideas sector) at some future date, say, in 2050. How will this affect output per person over time? Justify your answer using a graph