Consider how unemployment would affect the Solow growth model of chapter 7

QUESTION

Consider how unemployment would affect the Solow growth model of chapter 7. Suppose that output is produced according to the production function where K is capital, l is the labour force and u* is the natural rate of unemployment. The national savings rate is s, the labour force grows at rate n and capital depreciates at rate g. There is no technological progress.a.Express output per worker (y = Y/L) as a function of capital per worker (k = K/L) and the natural rate of unemployment. Describe the steady state of this economy.b.Suppose that some change in government policy reduces the natural rate of unemployment. Describe how this change affects output both immediately and over time. Is the steady state effect on output larger or smaller that the immediate effect? Explain.

ANSWER:

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