Short Questions:

PART E: Short Questions Short Question 1: [16 points] Consider the standard Solow model. Output per worker and the dynamics of capital per worker are given by the following expression: y=Akn k=sy5k where 5 Dr [I is the depreciation rate of capital. (a) Using a Solow diagram, show the steady state level of capital per worker. [label the x- axis and functions that you plot and mark the steady state level of capital per worker) (5 points] (b) Find an algebraic expression for the steady state capital per worker. [2 points) [c] Suppose a government policy forces households to increase savings rate a in the econ- only. What happens to steady state output per worker after a positive increase in savings? Include an economic rationale to justify your response. ( 3 points) (d) The real wage is equal to the marginal product of labor. Assuming a Cobb-Douglas production function Y = iriiut'f't'il_':"1 what is the growth rate of the real wage if the labor share is falling at 0.5% and labor productivity (3; = %) is growing at 2.5%? ( 3 points [e] Briey explain \" diminishing returns to a factor\". [ 3 points)