Q1. Suppose that there is a natural disaster that destroys part of the nation's capital stock.

a. Determine the effects on aggregate output, consumption, employment, and the real wage, with a reference to income and substitution effects and explain your results.

b. Do you think that changes in the capital stock are likely to cause business cycles? Explain with reference to your answer in part a and key business cycle facts (can be found in chapter 3).

Q.2 Suppose that there is technological change that reduces the costs of recruiting for firms. Using the Diamond-Mortensen-Pissarides (DMP) model, determine the effects on the unemployment rate, the vacancy rate, the labour force, the number of firms, aggregate output, and labour market tightness. Use diagrams and explain your results.

Q.3 Consider the Solow growth model. Suppose that with d=0.1, s=0.2, n=0.01, and z=1 and take a period to be one year.

a. Determine capital per worker, income per capita, and consumption per capita in the steady state.

b. Now suppose that the economy is initially in the steady state that you calculated in part a, and savings increases to s=0.4.

(i) Determine capital per worker, income per capita, and consumption per capita 10 years following the increase in the savings rate.

(ii) Determine capital per worker, income per capita, and consumption per capita in the new steady state.

(iii) Suppose that the depreciation rate d increases, what is the effect of this change on the quantity of capital per worker and output per worker from the steady state in a?