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2. (25 points) Consider the simple Solow growth model. The production function is y = 2040.45, where output worker y = { is a function
2. (25 points) Consider the simple Solow growth model. The production function is y = 2040.45, where output worker y = { is a function of capital per worker, k = ^ . The saving rate in this economy is 25%, the yearly population growth rate is 1.2% and the yearly depreciation rate is 7.5% (round all results to 2 decimal places). (a) (5 points) Suppose this year's capital per worker is 2021 = 100. Compute next year's capital per worker, 2022- (b) (10 points) Draw an approximate diagram of the model, with capital per worker, k, on the x-axis and output per worker, y, on the y-axis (hint: your diagram should have three curves). Identify the steady-state capital per worker, ko, and output per worker, yo, in your diagram and compute them. Suppose now that the saving rate falls to 20%. (c) (10 points) Compute the new steady-state, , and yo. Redraw your diagram from part (a) and overlay the changes. Is aggregate output growing faster or slower in this new steady-state compared to the one in part (b)? Explain
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