1. Suppose that a group of computer hackers discovers a way to break into secure computer networks, rendering such networks useless as a business tool and making obsolete the business methods developed over the last 15 years.
a. Use a basic Solow Growth Model diagram to clearly show what happens to the level of output-per-worker and the capital-to-labor ratio assuming that neither the size ofthe capital stock nordepreciation rates are directly afected by this development.
b. Provide a brief economic explanation of the adjustment process, i.e., explain what happens to move the economy from its initial steady state equilibrium to its new steady state equilibrium. Be sure to discuss the economy's growth rate at the initial steady state, at the final steady state, and during the transition period.
2. In the country of Happy Valley, a highly contagious disease immediately kills one-half of the workers between the ages of 20 and 35 years. The disease then disappears. Other workers are not affected. Because job skills rise with age, there is a significant increase in the quality of work skills for the labor force. Depreciation rates are not affected.
a. Use an extended Solow Growth Model diagram to clearly show what would happen to income-per-worker and the capital-to-labor ratio.
b. Provide a brief economic explanation of the adjustment process, i.e., explain what happens to move the economy from its initial steady state equilibrium to its new steady state equilibrium. Be sure to discuss the economy's growth rate at the initial steady state, at the final steady state, and during the transition period.
3. Before 1985, the German economy was at its steady state. The government was running a budget surplus while the economy had a current account deficit. Between 1985 and 1995, the government still ran a budget surplus but the current account moved into surplus. Between 1996 and 2005, the government budget fell into deficit while the current account remained in surplus. In all three periods the (absolute value) magnitude of the budget surplus and the current account deficit were approximately the same. Use a single Solow Growth Model diagram to clearly show the steady state levels of income-per-effective-worker and the capital-per-effective-worker ratio associated with:
a. The period before 1985.
b. The period between 1985 and 1995.
c. The period between 1996 and 2005.
Also, provide a brief economic explanation for any differences between these 3 periods and explain the adjustment mechanism that moved the economy from one steady state to another.
4. The U.S. economy was at its steady state in 1972. In 1973, a huge increase in energy prices led to a large permanent decrease in productivity in the U.S. economy.
a. Using a basic Solow Growth Model diagram, clearly show and provide a brief economic explanation for how this change affected the steady state, income-per-worker, and the capital-to-labor ratio.
b. Compare the rate of economic growth at the new steady state to the rate of economic growth at the old steady state.
c. What was the relationship between economic growth and labor force growth during the transition period, i.e., which grew faster? Be sure to explain your answer.
d. What was the relationship between labor force growth and capital accumulation (capital stock growth) during the transition period, i.e., which grew faster? Be sure to explain your answer