Question 4 (20 points) - Topic 3 Consider an economy that is characterized by the Solow Model. The (aggregate) production function is given by: Y = 30K 1/2(LXE) 1/2 Note: Keep your answer to 4 decimal places if needed. Be sure to show your work. In this economy, workers consume 75% of income and save the rest. The labour force is growing at 3% per year while the annual rate of capital depreciation is 5%. Initially, the economy is endowed with 4500 units of capital, 200 workers & 200 effective workers. a) Is the economy in its steady state? Yeso, explain. If the economy is not in its steady state, explain what happens to the levels of capital per effective worker and output per effective worker in the economy during very long-run transition. (5 points) The economy is in its steady state as described above (the steady state you solved for in part a). b) Suppose the Covid-19 causes the level of total factor productivity to fall permanently by 10% (i.e., the A term in the production function falls from 30 to 27). Determine the new steady state levels of capital per effective worker, output per effective worker & consumption per effective worker. Compared to the initial steady state (from part a) have these 3 variables gone up, down, or stayed the same? If they changed calculate their percentage change from initial steady state levels to new steady state levels. Explain your answer with the aid of ONE appropriate diagram (that depicts the steady state locations from part a & b. Be sure to explain in words what happens to the variables during transition to steady state. (10 points) NOTE: Fill in the following table to submit along with your answer to this part. Do not forget to provide an economic explanation as to why this change did or did not occur. Variable (part b) Change (if any) Explanation Capital per effective worker Output per effective worker Consumption per effective worker c) Suppose instead of the A term changing (i.e., the shock described in part b did NOT occur) Covid-19 causes the level of labour effectiveness to fall by 10%. Determine the new steady state levels of capital per effective worker, output per effective worker & consumption per effective worker. Compared to the initial steady state (from part a) have these 3 variables gone up, down, or stayed the same? If they changed calculate their percentage change from initial steady state levels to new steady state levels. (5 points) NOTE: Fill in the following table to submit along with your answer to this part. Do not forget to provide an economic explanation as to why this change did or did not occur. Variable (part c) Change (if any) Explanation Capital per effective worker Output per effective worker Consumption per effective worker