According to the balanced growth path implied by Solow-Romer model, what parameters are more susceptible to...

According to the balanced growth path implied by Solow-Romer model, what parameters are more susceptible to change in response to covid-19(please explain with the formula), in what way, and what would be the effect on the balanced growth path? What would the effect on the output gap and inflation be?

Expert Solution

In the balanced growth model, solow needed a production function that captures the relation between inputs and outputs at the aggregate level.if capital and labour inputs are increased by the same proportion then the output must also increase by the same proportion.the two parameters are 1)a-the share of the output earned by labour input and 2)b-share of the output earned by capital.if the economy has a fixed population hence fixed workforce assuming labour force participation rate is more or less constant, then any output growth must come from the growth of capital.it is achieved by saving and investing part of the output.to have sustained growth Solow introduces two factors into the growth and technological growth.according to Romer for persistent growth the effective labour must continuously grow so the marginal product of capital can stay above zero, in the long run, .so at present due to COVID 19 labours are becoming unemployed in such situation the other parameters like capital and technology has to be changed for balanced economic growth

Rahul Sunny answered 2 years ago

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