1. Assume that a country's aggregate production function is 0.25 0.75 Y = K L . Assume also that the saving rate is 40 percent (s=0.4) and that 10 percent of capital depreciates per year ( = 0.1 ). What is capital per worker, output per worker, and consumption per worker in the steady state?

a. k* is 6.32, y* is 1.59 and c* is 0.96

b. k* is 5.45, y* is 2.24 and c* is 1.88

c. k* is 3.93, y* is 3.29 and c* is 4.64

d. k* is 9.25, y* is 5.59 and c* is 1.96

2. What would happen if the economy started with a capital per worker higher than the steady state level? Use a graph to illustrate your answer.

a. Then investment is less than depreciation, so the economy will lose capital per worker.

b.Then investment is more than depreciation, so the economy will add capital per worker.

c.Then investment is more than depreciation, so the economy will lose capital per worker.

d. Then investment is less than depreciation, so the economy will add capital per worker.

3. Define the Golden Rule level of capital. Find the Golden Rule level of capital per worker, output per worker, consumption per worker, and investment per worker, and compare it with your result in (1).

a. K*gold is 3.38, Y*gold is 1.36 and C*gold is 1.02

b. K*gold is 5.35, Y*gold is 1.63 and C*gold is 1.13

c. K*gold is 6.28, Y*gold is 1.85 and C*gold is 1.42

d. K*gold is 4.8, Y*gold is 1.94 and C*gold is 1.67

4. What would the government have to do with the saving rate if it wanted the economy to achieve the Golden Rule level of capital. Find the optimal savings rate.

a. The savings rate should be increased to 0.5.

b. The savings rate should be increased to 0.6.

c. The savings rate should be reduced to 0.25.

d. The savings rate should be reduced to 0.35.