REVISIONShort Answers1) The Federal Reserve Bank may increase the Federal funds rate thisDecember. Use a Phillips curve type approach to analyse the impact ofthis policy on the economy.2) Briefly...

REVISIONShort Answers1) The Federal Reserve Bank may increase the Federal funds rate thisDecember. Use a Phillips curve type approach to analyse the impact ofthis policy on the economy.2) Briefly discuss any two characteristics of the balanced growth path. Long AnswerThe Cobb-Douglas production function is given as follows: Y A0 K L1 where Y is output, K is capital stock and L is labor force. Discuss how the model depicts returns to scale? Suppose the policy makers impose policies that increase the level ofcapital stock from 2% to 10%. How does this policy affects the steadystate growth rate? Any alternative policies that you may recommend? How can we investigate the degree of technology in the model? Discuss. ApplicationQuestion 1:A) Use algebra to show how capital stock changes at steady state. Thecapital stock is given as follows:K = s Y- dK where K = capital, s = saving rate, Y = income and d = depreciation.B) Use algebra to find the value of output when the economy is at steadystate. To do so, use a simple Cobb-Douglas production function withconstant returns and zero technical progress and zero growth inemployment: Y K L 1 The final solution is:s Y* d (1 ) .L Question 2:Write down the Phillips curve equations when: (i) expected inflation iszero, and (ii) expected inflation is positive.