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(10 points) Consider the following modification of a Solow model. The economy's production function is Cobb-Douglas Y = K(EL) -. The government taxes incomes proportionally
(10 points) Consider the following modification of a Solow model. The economy's production function is Cobb-Douglas Y = K(EL) -". The government taxes incomes proportionally at a rate 7 and invests fraction s, of the tax proceedings into capital (while putting the rest offshore). Households save fraction s out of their disposable income. Write down an equation for aggregate investment in the economy. Assuming that economy's efficiency of labor grows exponentially at g percent a year, population grows at n percent a year, and the depreciation rate equals o, find the steady state value of capital per effective worker as a function of s, Sq, T, n, d, g, and a
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