Extensions
There are many empirically and theoretically relevant extensions of the neoclassical growth model. We will not present these here for the sake of brevity. But the most im
portant ones are presented as exercises.
In particular, Exercise 8.17 endogenizes the labor supply decisions on individuals by introducing leisure in the utility function. The model presented in this exercise is particularly important, since it corresponds to the version of the neoclassical growth model most often employed in short-run and medium-run macroeconomic analyses. This exercise also shows that further restrictions on the form of the utility function need to be imposed in order to preserve the balanced growth structure. Exercise 8.18 introduces government expenditures and taxation into the basic model. Exercise 8.20 looks at the behavior of the basic neoclassical growth model with a free capital account, representing borrowing and lending opportunities for the economy at some exogenously given international interest rate r*. Exercise 8.21 combines the costs of adjustments in investment as in the q-theory with the basic neoclassical model. Finally, Exercise 8.22 looks at a version of the neoclassical model with multiple sectors.8.11.
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