Principles of Macroeconomics Consider two economies (US and CAN) that begin in steady state. The two...

Principles of Macroeconomics

Consider two economies (US and CAN) that begin in steady state. The two countries are identical. The production function is:

? = ?? + ?

Suppose the following parameter values:

? = 1, ? = 0.1, ? = 0.2, ? = 1000

Then, a strong earthquake destroys 90% the steady state physical capital in CAN and 10% the steady state physical capital in US.

Assume these new levels of steady state physical capital become the starting levels of capital for each economy at period 0: ?₀.

Find the growth rate of output for each economy between the periods 0 and 1. Do you observe the catch-up effect (Mankiw, Chapter 12) in this case? Explain in terms of the level of output and its corresponding growth rate.

Expert Solution

Rahul Sunny answered 2 years ago

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