ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Our closed economy has a production function Y = A•F(K,LxE), where Y, K, L, E & A all have their usual meanings as per our lectures & course textbook. Also, this production function exhibits all the usual mathematical/economic properties we usually assume: positive marginal
products, diminishing marginal products, complementarity between K & (LxE), and constant returns to scale. The aggregate consumption function depends negatively on the real interest rate,
the government budget is balanced initially & the economy is in both a long-run equilibrium and steady state initially. The population growth rate is 2% per year, capital
3% per year, the saving rate is 25% and technology is constant.
Suppose the level of labour effectiveness (E) suddenly permanently rises by 10%.
a) Use the long-run classical model to determine the qualitative impact of this shock on the long-run equilibrium levels of real output, consumption, investment, real interest rate, real wage & real rental
NOTE: Fill in the following table to submit along with your answer to this part. Do not
forget to provide an economic explanation as to why this change did or did not occur.
Transcribed Image Text:Change (if any)
Variable (part a)
Output
Consumption
Investment
Real interest rate
Explanation
Real wage
Real rental price of K
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