Reference no: EM132482622

Here are two examples that boil down to my question: In Solow model and in long-run, then in what scenarios will steady state change permanently?

?Example of Unemployment? Suppose the production function is Y=K^α[(1-u)L]^1-α, where K is capital, L is labor force, and u is the natural rate of unemployment. The saving rate is s, the labor force grows at rate n, and capital depreciates at rate d.

• Express output per worker as a function of capital per worker and the natural rate of unemployment u.
• Show the equation that describes the steady state of this economy.
• If government conducts policy that reduces the unemployment rate u, how this change affects output both immediately and overtime?

--Well, I compute that y=k^α(1-u)^1-α. The answer of this question states that there is a jump immediately, and then Y permanently increase by capital accumulation.

?Example of Labor?Consider an economy with technological progress but without population growth that is on its balanced growth path. Now suppose there is a one-time jump in the number of workers.

• At the time of the jump, does output per unit of effective labor rise, fall, or stay the same? Why?
• After the initial change (if any) in output per unit of effective labor when the new workers appear, is there any further change in output per unit of effective labor? If so, does it rise or fall? Why?
• Once the economy has again reached a balanced growth path, is output per unit of effective labor higher, lower, or the same as it was before the new workers appeared? Why?

--The answer of this question states that y=Y/AL will fall immediately, but in the long run, both k and y will move back to original steady state.

I wonder how to deal with this contradiction? I was told that the long-run steady state only changes when saving rate and depreciation change, but in the first example, the steady state changes when s and d remain the same.