Microeconomics

The economy is initially in its long-run equilibrium. The outbreak of the pandemic has increased the speed of automation and artificial intelligence (AI); as a result, the spending on automation and AI increases by 10%. a) According to the long-run classical model, what happens to the equilibrium levels of output, real interest rate, and investment? What happens to the real wage and the real rental price of capital? Explain your answer with the aid of THREE diagrams – one for the loanable funds market, one for the labour market, and one for the rental market for capital. b) (Continued from part a) What happens to the stock of the capital in the very long run? Use the long run classical model to examine the effects on output and real interest rate in the very long run. What happens to the real wage and the real rental price of capital? Explain your answer with the aid of another set of THREE diagrams – one for the loanable funds market, one for the labour market, and one for the rental market for capital.  c) Use the Solow to explain the impact of this shock on the steady state level of output per worker and consumption per worker. Use one Solow model diagram to demonstrate your answer, don’t forget to clearly label the initial and new steady state points. 



 Read less