If a country increases its savings rate, the steady-state equilibrium level of:
A) GDP will increase. B) investment will decrease.
C) capital stock will decrease. D) efficiency units of labor will increase.
Consider two economies: A and B. Both the countries have access to the same aggregate production function and have the same population and same efficiency units of labor, but have different saving rates. The savings rate is higher in country A in comparison to country B.
A
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Suppose the economy's production function is Y = A(300N – N2). The marginal product of labor is MPN = A(300 - 2N). Suppose that A = 10. The supply of labor is NS = 0.05w + 0.005G
(a) If G is 26,000, what are the real wage, employment, and output? (b) If G rises to 26,400, what are the real wage, employment, and output? (c) If G falls to 25,600, what are the real wage, employment, and output? (d) In cases (b) and (c), what is the government purchases multiplier; that is, what is the change in output divided by the change in government purchases?
Explain why the curve between A and B looks different than the curve from A to C. Provide an example of how a firm could opt to follow the A to C curve instead of the A to B curve.
What will be an ideal response?