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3 Simulating the Solow Growth Model In this problem, you will be computing the basic Solow Growth model, and analyzing how its key variables output,
3 Simulating the Solow Growth Model In this problem, you will be computing the basic Solow Growth model, and analyzing how its key variables output, capital, and investment move in response to exogenous shocks. You may use a program like Excel, Matlab, or R to complete this problem. As we haven't talked about MATLAB yet, I would recommend using Excel for it. Recall the three key equations of the Solow Growth model: Kt+1 =(1 (\"Kt + 3K (2) Y, = AthLga (3) C; = (1 8))\"; (4) where K a is capital in period t, s is the exogenous savings rate, Y; is aggregate output, A, is Total Factor Productivity (TFP), L; is aggregate labor supply, 6 is the depreciation rate of capital, and a is the capital share. For now, you may assume that there is no constant growth in either labor of TFP: At = A, Lt = L for every t. 1. Compute the steady state level of capital K, output l7, and consumption C' for a given set of exogenous s, A, as, 6, and L. 2. We now turn to some numerical exercises. For this section, suppose that 01 = 033,6 = 0.1, s = 0.2, A = 10, and L = 100 (numbers roughly corresponding to U.S. data: L in millions of workers). What is the steady state level of capital K, output 17', and consumption (7 given these parameters? 3. Suppose we reduced the savings rate to 3' = 0.1, so that people only save 10% of their income on average (roughly the savings rate of the Ivory Coast). What do the steady state levels of capital, output, and consumption become? Does the savings rate seem important in determining long run differences of wealth between countries? What else might explain these differences
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