Consider an economy with the following production function and characteristics. Y=AN1/3 K2/3 A=1 Saving rate=.6 Population growth
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Question:
Consider an economy with the following production function and characteristics. Y=AN1/3 K2/3
A=1
Saving rate=.6
Population growth rate=.04
Average depreciation rate=.02
a) Find the steady-state levels of k and y.
b) Define the golden-rule level of k.
c) Find the golden-rule level of k for this economy. Is our steady-state from a) above or below the optimal level?
d) In order to get to the golden rule level of k should policymakers in this economy encourage more or less saving?
Graphically show (and explain briefly in words) how this change in saving will impact the economy. Be sure to label all relevant curves, axes, and points for maximum credit.
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