3 Homework 3 - Homepage Usask

(Analytically, suppose that the natural rate of unemployment is u ∗ 1.In
the steady state,
´ 1
1−α
k ∗ 1 =
³
s
d0 y ∗ 1 =
³
s
d0 The first effect would be
y = (1−u ∗ 2) 1−α
∙ ³
s
d0 (1 − u ∗ 2) 1−α ³ s
d0 (1 − u ∗ 1) and
´ α
1−α
(1 − u ∗ ).
but eventually output per capita equals
y ∗ 2 =
´ 1
1−α
(1 − u ∗ ¸α
1) =
´ α
1−α
(1 − u ∗ 1) α
³
s
d0 ´ 1
1−α
(1 − u ∗ 2).
Again you were not required to do this.)
4. The answer is enclosed.
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