2 Long Questions [ 60 points; 30 points each] For each question, please provide a brief answer in the alotted space. 1. The Solow Model of Economic Growth. Recall the Solow Growth Model studied in class with constant returns to scale production technology, Yt=AKtLt1 where Y is output, A is total factor productivity (TFP), K is capital, and L is labor. The capital stock depends on investment and is determined by the capital accumulation equation, Kt+1=It+(1)Kt where Kt+1 is tomorrow's capital stock, It is aggregate investment, and is the depreciation rate. The aggregate resource constraint is Ct+It=Yt where C is aggregate consumption. For simplicity, we assume investment is a constant fraction s of aggregate output, It=sYt, and that the population is fixed at L. (A) [5 pts] What are the model's endogenous and exogenous variables? Explain the difference between these two groups. (B) [5 pts] Derive the steady state level of capital, Kss. Explain what is special about this level of the capital stock. [hint: what happens above and below this level?] C) [5 pts] Solve for the steady state level of aggregate output and consumption. 2 Long Questions [ 60 points; 30 points each] For each question, please provide a brief answer in the alotted space. 1. The Solow Model of Economic Growth. Recall the Solow Growth Model studied in class with constant returns to scale production technology, Yt=AKtLt1 where Y is output, A is total factor productivity (TFP), K is capital, and L is labor. The capital stock depends on investment and is determined by the capital accumulation equation, Kt+1=It+(1)Kt where Kt+1 is tomorrow's capital stock, It is aggregate investment, and is the depreciation rate. The aggregate resource constraint is Ct+It=Yt where C is aggregate consumption. For simplicity, we assume investment is a constant fraction s of aggregate output, It=sYt, and that the population is fixed at L. (A) [5 pts] What are the model's endogenous and exogenous variables? Explain the difference between these two groups. (B) [5 pts] Derive the steady state level of capital, Kss. Explain what is special about this level of the capital stock. [hint: what happens above and below this level?] C) [5 pts] Solve for the steady state level of aggregate output and consumption