Macroeconomics Preview File Edit View Go Tools Window Help O@ 61%E, Wed 9:28 AM

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Macroeconomics

Preview File Edit View Go Tools Window Help O@ 61%E, Wed 9:28 AM Q.E PS1.pdf (page 1 of 2) Q Search A Crop 5. Consider a Solow growth model with constant saving rate s and depreciation rate of capital 2) equal to o. Assume that population is constant and the aggregate output is given by the CES (Constant Elasticity of Substitution) production function where Al -JA: 1 +9K and Al+/At = 1 + gL-JK > 0 and JL > 0, Suppose the elasticity of substitution between capital and labor is less than one, 0

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The financial system is also particularly important in reallocating capital and thus providing the basis for the continuous restructuring of the economy that is needed to support growth. In countries with a highly developed financial system, we observe that a greater share of investment is allocated to relatively fast growing sectors. When we look back more than one century ago, during the Industrial Revolution, we see that England's financial system did a better job in identifying and funding profitable ventures than other countries in the mid-1800s. This helped England enjoy comparatively greater economic success. The banker and former editor of "The Economist" Walter Bagehot expressed this in 1873 as follows. "In England, however, ... capital runs as surely and instantly where it is most wanted, and where there is most to be made of it, as water runs to find its level".

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