1. Assume that a country's aggregate production function is Y = AK^a(LE)^1-a . Assume also that the saving rate (s) is 0.35, that 15 percent of capital depreciates per year ( S = 0.15 ), that population grows at 2% per year ( n = 0.02 ) and that labor efficiency is ( g = 0.03 ). Alpha is 0.35 ( a = 0.35 ) and A is equal to 1. What is capital per effective worker, output per effective worker, and consumption per effective 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 2.37, y* is 1.35 and c* is 0.88

2. What will happen with capital per effective worker in steady state if the economy experiences technological innovation (an increase in parameter A in our production function)? Illustrate your answer with a graph.

A. the production function shifts down and the investment functions shifts upwards, decreasing the steady state capital per effective worker

B. the production function shifts up and the investment function shift downwards, increasing the steady state capital per effective worker

C. the production and investment functions will shift downwards, decreasing the steady state capital per effective worker

D. the production and investment functions will shift upwards, increasing the steady state capital per effective worker

3. Define the Golden Rule level of capital. Find the Golden Rule level of capital per effective worker, output per effective worker, consumption per effective worker, and investment per effective worker, and compare it with your result in (a). Explain. What would the government have to do with the saving rate if it wanted the economy to achieve the Golden Rule level of capital per effective worker?

A. k* is 2.37, y* is 1.35 and c* is 0.88

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 2.73, y* is 1.53 and c* is 0.28

4. What is the optimal savings rate?

A. 0.35

B. 0.08

C. 0.65

D. 0.28

5. Illustrate graphically what would happen with output per effective worker, consumption per effective worker, and investment per effective worker during the transition from the initial steady-state capital per effective worker (question 1) to the Golden Rule level of capital per effective worker (question 3). In particular,

A. consumption per effective worker, output per effective worker and investment per effective worker all remain the same, since we are already in the consumption maximizing steady state.

B. consumption per effective worker decreases on impact, and then slowly rises to a level above the initial steady state level.

C. consumption per effective worker increases on impact, and then slowly declines to a level above the initial steady state level.

D. consumption per effective worker, output per effective worker and investment per effective worker all increase slowly to a coonsumption maximizing steady state.