Economics 304 Homework #12 � Answer Sheet Correct Answers

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Economics 304 Homework #12 – Answer Sheet Correct Answers 1. According to the economic growth theory that we have studied, how would each of the following events affect per capita consumption in the long - run (i.e., after return to the steady state). . Illustrate graphically and explain. In all of the parts, we can assume that the rate of saving is less than the golden rule level of saving, so that a reduction in steady - state output per worker leads to a reduction in steady - state consumption per worker. a. A terrorist attack destroys a p o r tion of the nation’s capital stock. Assume that the economy begins (pre - attack) in the steady state. The destruction of a portion of the nation’s capital will reduce the capital - labor ratio to a level that is below the steady - state level. (We are assuming here that the population and labor f orce were not reduced significantly by the war.). We know that when the capital - labor ratio is below its steady - state level, the rate of saving (and therefore investment) will be greater than the rate required to replace worn out capital and equip new work ers, so the capital labor ratio will be growing. This growth in the capital labor ratio will continue until the economy returns to the steady state. Since there was no change in f , s , n , or d , the steady state will be the same as it was before the war. k * Per capita investment k sf ( k ) ( n+d ) k k 0
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