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- The growth rate of total output = rate of technological change (= ) plus the elasticity of output with respect to labor (= ) times the growth rate of labor (= ) plus the elasticity of output with respect to capital (= ) times the growth rate of capital (= ).
- = (0.4*6%)+(0.6*2%)

=0.036%

C. Considering technological change (2%)

The growth rate of total output = rate of technological change (2%) plus the elasticity of output with respect to labor (= 0.4) times the growth rate of labor (= 6%) plus the elasticity of output with respect to capital (= 0.6) times the growth rate of capital (= 2%). Thus, the

=(2%)+(0.4*6%)+(0.6*2%)

=0.056% per year.

a. The growth rate of total output = rate of technological change (= ) plus the elasticity of output with respect to labor (= ) times the growth rate of labor (= ) plus the elasticity of output with respect to capital (= ) times the growth rate of capital (= ).

Output=3%

Capital=0.3

Labor=0.7

Both grow at 1% a year

If it grows by 1%, therefore goes to 101%

=(1.01*0.7*3)+(1.01*0.3*3)

=3.03

Therefore growth rate total factor productivity is 3.03%

b. If labor and capital stocks are fixed, there would be no change in the growth rate total factor productivity.

3.a. The growth rate of total output = rate of technological change (= ) plus the elasticity of output with respect to labor (= ) times the growth rate of labor (= ) plus the elasticity of output with respect to capital (= ) times the growth rate of capital (= ).

Output=0.3*10%+0.7*10%

=0.03+0.07

=0.1.

b. The growth rate of total output = rate of technological change (= ) plus the elasticity of output with respect to labor (= ) times the growth rate of labor (= ) plus the elasticity of output with respect to capital (= ) times the growth rate of capital (= ).

=0.3+(0.7*0.1)

=0.37.

The total output is increased by 0.37%.

c. Since there would be more availability of labor, most companies would pay lower wages for their services because it would be easily available. This would hence lead to the reduction in the standard of living of the population.

d. If the increase in the welfare is due to an influx in the number of women to the workplace, it would definitely lead to a higher level of welfare as most families who were predominantly dependent on men now have an extra source of income. This improves the standards of living.

4. If an earthquake were to destroy a quarter of the capital stocks in a country, it would lead to adverse effects on the economy. Most businesses would run into losses and therefore lead to many cost-cutting measures in the businesses in order to make them viable. This might be in the form of laying off workers so as to have a lean workforce which the companies can sustain in terms of wages. In the short term, there would also be many costs that would be incurred in terms of rebuilding many of the structures that were destroyed by the earthquake. The insurance sector might also be overstretched as it has to compensate very many of their clients who have incurred the losses. In the long term, the economy would be shrunk in terms of capital base but would recover to a level of profitability again. Many people would then get their jobs back after some time.

- a. If the government were to reduce income tax, it would lead to many people leaving the labor pool which would lead to diminished aggregate in production. This is because there would be an increase in earnings for the same amount of work done. It would also lead to people opting to retire earlier or even seek vacations so as to spend the increased earnings.
- Supply side economics refer to the fact that if the government was to reduce taxes, it would lead to a more rejuvenated private sector which would lead to more job opportunities as well as productivity in the economy. It is this marginal tax rate which gives the incentive to earn. This can also be looked as those high taxes discourage work because the net returns would be diminished. They also discourage investment and savings for individuals. Therefore in the example above, reduced taxes would imply a negative shift in production. Less output would be produced by the labor hence leading to reduced aggregate output.
- a. Government spending includes those state-provided goods and services that would include public and merit goods. The spending in government. The aggregate demand would also shift to the right. The reason for this is because the output would increase as well as the price level. When taxes remain high it would cause a shift to the left. This is because it would lead to most firms trying to cut back on spending.

b. In the Keynesian theory, we find that the changes in the aggregate demand has a profound effect on the short term real output and also on the labor turnover. It however has no significant effect on the price level in the economy. The short term effects cannot also give a picture on how the long term would be like hence no conclusive predictions can come out of the changes in demand. Therefore the only conclusion is that, in the short-term, any aggregate increase in government spending would lead to an increase in real output.

The level of output would be increased because many companies would have the marginal earnings due to this. The price level would however increase as many from the labor force would be forced to use their excess income which comes from increased demand for goods.