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1 Fundamental Equation of the Solow-Swan Model (Cont'd/ Consider the Solow-Swan model of growth. Imagine that the production function is Y = AKall-a (a) In
1 Fundamental Equation of the Solow-Swan Model (Cont'd/ Consider the Solow-Swan model of growth. Imagine that the production function is Y = AKall-a (a) In the previous problem set, we derived the fundamental equation of the Solow-Swan model. Write down it, and draw the graph indicating the steady-state level of capital (k* ). Suppose that Country A is in its steady state so its capital stock is ". Imagine that the country receives a gift of one unit of capital from the World Bank (so, suddenly, the capital stock becomes (* + 1). (b) Can you say what is going to happen to the growth rate of k of Country A immediately after the donation? Why? (c ) What will the capital stock of Country A be in the long run? Explain
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