Question 6: Discuss the following statements: a. 'Stabilisation policy can be used to help the economy converge faster to its natural level of output after a positive or a negative shock.' b. There are no policy options to deal with a recession in a liquidity trap.' Consider the following economy. The production function is F(K, L) = K0.4L0.6. The saving rate and the depreciation rate are respectively: s= 0.20 and 8 = 0.1. Population growth is 2%, i.e. n = 0.02. c. Derive the capital accumulation equation for this economy. d. Find the steady state value of the capital stock per capita. e. Are the capital stock and output growing in the long-run? If so, at which rate? f. Suppose that the production function is instead: F(K) = K. Find out if there is economic growth in the economy.

Question 6: Discuss the following statements: a. 'Stabilisation policy can be used to help the economy converge faster to its natural level of output after a positive or a negative shock.' b. There are no policy options to deal with a recession in a liquidity trap.' Consider the following economy. The production function is F(K, L) = K0.4L0.6. The saving rate and the depreciation rate are respectively: s= 0.20 and 8 = 0.1. Population growth is 2%, i.e. n = 0.02. c. Derive the capital accumulation equation for this economy. d. Find the steady state value of the capital stock per capita. e. Are the capital stock and output growing in the long-run? If so, at which rate? f. Suppose that the production function is instead: F(K) = K. Find out if there is economic growth in the economy.

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model

Section: Chapter Questions

Problem 1CQ

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