Question on exogenous shock

Stochastic simulations
1

Dear Professor Pfeifer,

I’ve got a silly question on the reaction of variable in the model.

The production function is set as {{y}_{t}}={{\left( {{k}_{t}} \right)}^{\alpha }}{{\left( {{l}_{t}} \right)}^{1-\alpha }} in the model. I wonder that the entrepreneurs’ demand of labor will increase or decrease when a exogenous shock lead to the decline of asset price?

Thank you for your time on this.

2

I don’t think there is a general answer to your question. It should depend on how the variables in the model react, e.g. the real wage.