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Consider an economy that is described by the Romer two-sector model, with the following production function: Yt = K α t ((1 − u)LAt) 1−α , where u is the proportion of the population employed in the “university sector”.
Assume that the size of the population, L, does not change over time, while the growth rate of “knowledge” is equal to ∆At At = u.
a) Find the steady state in this economy. What happens to the capital per capita, output per capita and consumption per capita in the steady state?
b) Suppose that s = 0.1, δ = 0.1, α = 0.3, L = 1 and u = 0.1. Furthermore, suppose that the economy is in the long-run equilibrium, but in period t = 0 the government implements a policy that changes u to 0.2. What happens to the output and consumption per capita in the short and the long run?
c) Would you advice the government to implement a policy which would change u to 1.0? Why or why not?
Assume that the size of the population, L, does not change over time, while the growth rate of “knowledge” is equal to ∆At At = u.
a) Find the steady state in this economy. What happens to the capital per capita, output per capita and consumption per capita in the steady state?
b) Suppose that s = 0.1, δ = 0.1, α = 0.3, L = 1 and u = 0.1. Furthermore, suppose that the economy is in the long-run equilibrium, but in period t = 0 the government implements a policy that changes u to 0.2. What happens to the output and consumption per capita in the short and the long run?
c) Would you advice the government to implement a policy which would change u to 1.0? Why or why not?
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