Assume that the economy operates according to the Solow model with Cobb-Douglas production function:Y=K 0.25 L 0.75
Question:
Assume that the economy operates according to the Solow model with Cobb-Douglas production function:Y=K0.25 L0.75 whereYis aggregate output,Kis aggregate capital, andLis aggregate labor.ou know that the saving rate in this economy is s = 0.3 and that capital depreciates at a constant rate lambda = 0.04 You also knowthat the labor force in this economy grows at the rate n = 0.02
a) Compute the steady state capital per worker in this economy .(Use two decimal places)
b) Assume that the economy is currently at the steady state that you found in the previous question. Write the expression for aggregate outputYat the steady state, then use the result from calculus that we previously discussed to answer this question.
Is the growth rate of aggregate outputYat this steady state : negative ?zero ? equal to 2% ? larger than 2% ?
c) Assume now that the saving rate increases from s = 0.3 to s = 0.35 The economy starts moving towards the new steady state originated by the higher saving rate.Write the expression for aggregate outputYduring this transition phase, then use the result from calculus that we previously discussed to answer this question.
Is the growth rate of aggregate outputYat this steady state : negative ?zero ? equal to 2% ? larger than 2% ?
Expert Answer:
