Suppose future total factor productivity,
z primez′,
and current capital, K, increase at the same time. Show that it is possible for the real interest rate to remain constant as a result. What does this say about the model's ability to explain the differences between poor and rich countries and to explain what happens as a country's economy grows?
Part 2
An increase in future total factor productivity,
z primez′,
results in the output demand curve
â–¼
shifting to the left
remaining unchanged
shifting to the right
and the output supply curve
â–¼
remaining unchanged.
shifting to the right.
shifting to the left.
An increase in the current level of capital, K, results in the output demand curve
â–¼
shifting to the left
remaining unchanged
shifting to the right
and the output supply curve
â–¼
remaining unchanged.
shifting to the right.
shifting to the left.
Therefore, the combined effects of an increase in future total factor productivity,
z primez′,
and an increase in the current level of capital, K, results in the
â–¼
output demand curve shifting to the right
output supply curve shifting to the left
output demand curve shifting to the left
output supply curve shifting to the right
and
â–¼
the output supply curve shifts to the right.
the shift in the output demand curve is uncertain.
the output demand curve shifts to the right.
the shift in the output supply curve is uncertain.
The increase in future total factor productivity and current capital stock
â–¼
both increase investment level.
have counteracting effects on investment level.
both decrease investment level.
If the effect of the increase in future total factor productivity outweighs the effect of an increase in capital, then output
â–¼
rises unambiguously
is ambiguously affected
falls unambiguously
and the effect on the real interest rate is undetermined.