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Assume the following aggregate production function for an economy: Y = 1.5VKVL. Furthermore, assume the following: The amount of labor is fixed at L =
Assume the following aggregate production function for an economy: Y = 1.5VKVL. Furthermore, assume the following: The amount of labor is fixed at L = 1. The economy saves 50 percent of its total income. The yearly depreciation of the capital stock is 6 percent. a. Compute and characterize the steady state of the economy that will result according to the Solow-Swan model. (7 points) b. Show the model and the steady state in an appropriate diagram. (The values in the diagram do not have to be exact. Leave some space for subtask c.) (6 points) Suppose that there is technological progress which increases productivity by 20 percent. Compute and characterize the new steady state of the economy; now does it compare to the old steady state? (4 points) Show the change in the diagram. (5 points)
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