Question 1 Consider the following economy. The production function is F (K, L) = K 0'(AL)-5. The saving rate and the depreciation rate are respectively:
Question 1 Consider the following economy. The production function is F (K, L) = K 0"'(AL)-5. The saving rate and the depreciation rate are respectively: 3 = 0.20 and 6 = 0.05. There is no population growth. The growth rate of technological progress is 2%, i.e. n = 0.02. (i) Derive the capital accumulation equation for this economy. (30 marks) (ii) Find the steady state value of the capital stock per effective worker. (20 marks) (iii) Assume that the economy is at the steady state. Now suppose that the saving rate increases to: s = 0.30. Calculate the effect on the steady state of the economy and discuss the process of convergence to the new steady state using a diagram. (20 marks) (iv) Discuss the following statement: 'An increase in the saving rate induces an increase in the rate of economic growth in the long- run only if the production function is linear in the accumulating factor (i.e. capital).' (30 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance