Oct 02, 2017 term paper 2

ASSUME THAT OUTPUT PER UNIT OF LABOR IS RELATED TO THE CAPITAL–LABOR RATIO BY Y T = R LOG(K T );…

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Assume that output per unit of labor is related to the capital–labor ratio by yt = r log(kt); and that saving is a fixed proportion, s, of output.

a. What is the capital accumulation condition?

b. Derive the equation characterizing the steady-state capital–labor ratio.

c. For the parameter values k0 = 0:5, s = 0:1, d = 0:05, n = 0, and r = 2, plot the capital–labor ratio and the consumption–labor ratio as functions of time.

d. What is the effect of an increase in r on the capital–labor ratio?

e. Repeat part c, starting the economy above the steady-state capital–labor ratio. Explain the observed growth path.


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