Answer Happy

This will be a graph shifting question, which asks about the intuition of both the AD-As figures and the l-NS figures, specifically relating them to long-term growth. 1. When we consider the equation for National Savings (NS) from lecture and our model, would an increase in Real GDP lead to an increase, decrease, or no change in the quantity of National Savings supplied? Explain your answer. [3 points] Suppose that the economy uses (only) two major inputs in its production: capital (K) and labour (L). Suppose also that we are thinking about long-term growth, specifically through productivity growth. 2. Using the AD-AS model we have been working with, what would you expect to happen to equilibrium Y* and p* in the economy over the long-run as this productivity growth continues to occur? Assume that the government takes no action in this case and so that the economy adjusts naturally. Explain your answer using explanations and also the AD-AS figures. [3 points) Suppose that the government is concerned about keeping pace with this long-term growth and ensuring that it maintains a stable price level in its long-term equilibrium. Therefore, it does act and decides to keep increasing the autonomous demand for investment in order to try and maintain a constant price level in the face of this productivity growth. 3. Does the AD-AS model predict that this strategy could be effective? What would we expect to happen to both p* and the equilibrium interest rates in this example? Explain your answer. [3 points] Finally, consider if this increase in investment as a result of government policy might have a further effect on long-term growth. Assume that this investment is used completely on capital accumulation - i.e. increasing the capital stock in the economy. Suppose that the production function in this economy instead exhibits both (i) increasing returns and (ii) constant returns to scale, as in lecture. 4. Notice that the production function of this economy exhibited not diminishing returns, but rather increasing returns, which means that for each additional unit of capital (ceteris paribus), the marginal product of capital is increasing. Would this capital 1 accumulation be a sustainable source of long-term growth in both GDP and GDP per capita? Why or why not? Explain your answer. [3 points]