Macroeconomics

HW #5 – Transition Dynamics

Problem 1

Suppose that an economy was initially in steady state when many of its workers are killed by an infectious disease. Assume that none of its capital stock is destroyed by the disease. Use the Solow Model without technological progress to answer the following questions.

1. What is the immediate impact on total output?
2. What is the immediate impact on output per worker?
3. Assuming that the country's saving rate remains unchanged, what happens to:
   
   • output per worker in the post-disease economy?
   • investment per worker in the post-disease economy?
   • consumption per worker in the post-disease economy?
   Illustrate your answers with a diagram.
4. Is the growth rate of output per worker in the post-disease economy greater or smaller than it was before the disease?

Problem 2

Suppose that an economy was initially in steady state when part of its capital stock is destroyed by an earthquake. Assume that none of its workers are killed by the earthquake. Use the Solow Model without technological progress to answer the following questions.

1. What is the immediate impact on total output?
2. What is the immediate impact on output per worker?
3. Assuming that the country's saving rate remains unchanged, what happens to:
   
   • output per worker in the post-quake economy?
   • investment per worker in the post-quake economy?
   • consumption per worker in the post-quake economy?
   Illustrate your answers with a diagram.
4. Is the growth rate of output per worker in the post-quake economy greater or smaller than it was before the earthquake?