1. Suppose the level of technology is constant. (let y=f(k)) Then it jumps to a new, higher constant level. (let y=g(k))

a) How does this technological jump affect output per head, holding the capital-labor ratio

constant? Explain using a graph.

b) Show the original steady-state equilibrium and the new steady-state equilibrium in the

graph. What has happened to per capita saving and the capital-labor ratio? What happens

to output per capita?

c) Chart the time path of the adjustment to the new steady state. Does the investment ratio

rise during transition? If so, is this effect temporary?

d) Assume technological advance lead to lower production costs. Show the effect of such an

event on national income, unemployment, inflation, and interest rates with an AD-AS diagram, assuming completely flexible wage rates.