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02. In answering the following questions, use the SolowSwan model of a closed economy without government, described below. Population growth and labour-augmenting technical change are
02. In answering the following questions, use the SolowSwan model of a closed economy without government, described below. Population growth and labour-augmenting technical change are allowed for, and the economy has clearing factor markets (prices adjust to ensure that quantities demanded equal quantities supplied). Output: Y = ECI(E1'II)1~SE Labour augmenting technical change: Consumption: Savings: where 3 Is the average saving rate E'ft') and It Is constant Investment: I' = S Depreciation: dK where the parameter vatues are: Production function: a. = 0.5 Depreciation rate: d = 0.05 In the above-described production function, E denotes the technical efciency units per worker (i.e., labour-augmenting technology) and EN is number of effective workers. Unless otherwise indicated, there is no technical change, so that E is constant (assuming E = 1 for simplicity} and, therefore, 9 = 0. {1) The initial saving rate is s = 0.15. The government adopts policies to alter the saving rate to achieve the Golden Rule level. Calculate consumption per worker in the initial and nal steady states of the economy. Without calculating the transition, describe and explain the immediate change that takes place in consumption per worker and the subsequent changes. Sketch the path of consumption per worker in the transition to the Golden Rule steady state. Comment on any policy dilemma implied
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