Q7 Basic Solow Model II

Consider the basic Solow model.

Y=AKL1

C=(1s)Y

Y=C+I

K=IK

where L is constant.

Suppose that the depreciation rate falls. Answer the following.

Q7.1

Construct a single well-labeled Solow diagram that clearly shows the changes in steady state capital, output, and investment per worker.

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Q7.2

If the depreciation rate falls, does steady state consumption per worker increase, decrease, or stay the same? Clearly explain how you know.