Question
Consider a Solow growth model with a production function Yt = A Kt ^(1/4) Lt ^(3/4). Population is fixed at L. (a) Solve for the
Consider a Solow growth model with a production function Yt = A Kt ^(1/4) Lt ^(3/4). Population is fixed at L.
(a) Solve for the steady state values K , Y , and C as functions of exogenous variables and parameters.
(b) Draw the Solow diagram with K on the horizontal axis and Y , I, and depreciated capital on the vertical axis. Show where Y , K , I , and C are on this graph.
(c) Let's imagine there is an increase in the depreciation rate. Draw what has changed on Solow graph. Immediately after the change, is the economy growing or shrinking? Are the new steady state values Y , K , I , and C the same, above, or below the original steady state?
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