Question
Using the production function approach (augmented model), answer the following questions. For simplicity, assume that there are two countries: a poor country (with low living
Using the production function approach (augmented model), answer the following questions. For simplicity, assume that there are two countries: a poor country (with low living standards) and a rich country (with high living standards). For each of the following cases, draw a separate production function diagram (with output per worker q as a function of capital per worker k) and a separate MPK diagram (MPK versus k). Draw the two diagrams with the production function directly above the MPK diagram so that the level of capital per worker k is consistent on your two diagrams. Assume each country has the same MPK (prior to the shock) and that their productivity levels are different, with AP < AR. [Total = 14 marks] (a) The rich country experiences an increase in human capital through government funding of education. (4 marks) (b) The poor country experiences an improvement in political stability through the signing of a peace treaty between warring factions. (5 marks) (c) A sovereign debt default by the poor countrys government leads to an increase in the risk premium. (5 marks)
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