Consider how unemployment would affect the Solow model. Suppose that output is produced according to the production function Y=Kα[(1−u)L]1−α where K is capital, L is the labor force, and u is the natural rate of unemployment. The national saving rate is s, the labor force grows at rate n, and capita] depreciates at rate δ. a. Express output per worker (γ=Y/L) as a function of capital per worker (k=K/L) and the natural rate of unemployment (u). b. Write an equation that describes the steady state of this economy. Illustrate the steady state graphically, as the standard Solow model. c. Suppose that some change in government policy reduces the natural rate of unemployment. Using the graph you drew in part (b), describe how this change affects output both immediately and over time. Is the steady-state effect on output larger or smaller than the immediate effect? Explain.
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Consider how unemployment would affect the Solow model. Suppose that output is produced according to...
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