Question

4. Consider an economy that has been on steady state until period $t_w$ (see Figure 4.1 below). Thus, capital per worker has been constant until $t_w$. The economy's capital per worker until period $t_w$ is equal to $k_t$ (i.e. steady-state value) and is indicated by the horizontal line. The corresponding plot for output per worker is given in Figure 4.2. Assume that the economy experiences a significant increase in productivity after year $t_w$. That is, A increases or jumps upward after year $t_w$ (due to, for example, policy reforms that make the economy more efficient). Using the plot in Figures 4.1 and 4.2, show how this change affects the dynamics of capital per worker ($k_t$) and output per worker ($y_t$) during the periods after $t_w$. Explain (verbally) the economic intuition (write down on the space below the figure).

          4. Consider an economy that has been on steady state until period $t_w$ (see Figure 4.1 below).
Thus, capital per worker has been constant until $t_w$. The economy's capital per worker until
period $t_w$ is equal to $k_t$ (i.e. steady-state value) and is indicated by the horizontal line. The
corresponding plot for output per worker is given in Figure 4.2. Assume that the economy
experiences a significant increase in productivity after year $t_w$. That is, A increases or
jumps upward after year $t_w$ (due to, for example, policy reforms that make the economy
more efficient). Using the plot in Figures 4.1 and 4.2, show how this change affects the
dynamics of capital per worker ($k_t$) and output per worker ($y_t$) during the periods after $t_w$.
Explain (verbally) the economic intuition (write down on the space below the figure).

4. Consider an economy that has been on steady state until period tw (see Figure 4.1 below).
Thus, capital per worker has been constant until tw. The economy's capital per worker until
period tw is equal to kt (i.e. steady-state value) and is indicated by the horizontal line. The
corresponding plot for output per worker is given in Figure 4.2. Assume that the economy
experiences a significant increase in productivity after year tw. That is, A increases or
jumps upward after year tw (due to, for example, policy reforms that make the economy
more efficient). Using the plot in Figures 4.1 and 4.2, show how this change affects the
dynamics of capital per worker (kt) and output per worker (yt) during the periods after tw.
Explain (verbally) the economic intuition (write down on the space below the figure).

Added by Michael V.

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