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. is 3.38, is 1.36 and is 1.02

b. is 5.35, is 1.63 and is 1.13

c. is 6.28, is 1.85 and is 1.42

d. is 4.8, is 1.94 and 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.

5. Illustrate graphically what would happen with output per worker, consumption per worker, and investment per worker during the transition from a higher level of steadystate capital per worker to the Golden Rule level of capital per worker. What happens with consumption per worker?

a. Consumption will increase on impact, and then will expand exponentially.

b. Consumption will decrease on impact, and then will decrease slowly to a level above the initial level.

c. Consumption will increase on impact, and then will decrease slowly to a level above the initial level.

d. Consumption will decrease on impact, and then will continue to decrease slowly until it reaches a level above the initial level.

6. Suppose that two countries are exactly alike in every respect except that the populations grows in Country A at 3% each year ( = 0.03) while the population in Country B grows 1% each year ( = 0.01). In which country will the capital stock per worker be larger? Illustrate graphically.

a. Neither country will grow, because they are in steady state. b. Country A

c. Country B

d. Both countries will grow at 5%.

7. In which country will the Golden rule level of capital per worker be higher? Illustrate graphically.

a. Both countries will grow at 5%.

b. Neither country will grow, because they are in steady state. c. Country A

d. Country B

8. Which country will have the faster growth of output per worker in steady state?

a. Country A

b. Country B

c. Both countries will grow at 5%.

d. Neither country will grow, because they are in steady state