Question 3

Consider Solow model without technological change.

the Solow diagram, label axes, curves, steady state A, steady state capital per worker (k₀), and steady state output per worker (y₀).

a. On the diagram show the effects of adecrease in savings ratefrom s to s'. Label new steady state B, new steady state capital per worker (k₁), and new steady state output per worker (y₁).

b. Explain the logic of transition from one steady state to another.

c. How do y (output per worker), k (capital per worker), g_y(growth rate of output per worker), and g_Y(growth rate of output) change in the long run? (increase/decrease/stay the same).