Question
show all working: 1. In the basic Solow growth model (no population growth, no technological progress), we assumed that investment is a constant fraction of
show all working:
1. In the basic Solow growth model (no population growth, no technological progress), we assumed that investment is a constant fraction of output. Suppose that in the country of EastLand the production function is y = k^0.6 Suppose that the saving rate in EastLand has always been 0.6 but that, due to a change in government policy in period T , citizens switch permanently to a saving rate of 0.4. Use a graph to describe the paths of (log of) output per person, (log of) consumption per person, and (log of) investment per person. Make sure that your graph includes period T as well as periods before and after T .
2. Under the assumptions of Solow's growth model, suppose that the production function is given by y = k^0.5 the saving rate is s = .4, the depreciation rate is 10%, and the rate of growth of the population is 0%. (a) Find the steady state level of output per capita? What is the rate of growth of total output Y when the economy is at the steady state? (b) Assume now that the population grows at a constant rate of 5%. Find the steady state level of output per capita. What is the rate of growth of total output Y when the economy is at the steady state
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored 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
Get Started