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Suppose the economy has no population growth (Lt = L), and productivity grows at a constant rate g. As usual, Yt = AtKtL1 Kt+1 Kt

Suppose the economy has no population growth (Lt = L), and productivity grows at a constant rate g. As usual, Yt = AtKtL1 Kt+1 Kt = It Kt It = Yt Ct + It = Yt At+1 = (1 + g)At 1. Let H A1 L and k = Kt . Use the equations above to derive an difference equation in 1 2. Derive the steady state level of capital per effective unit of labor. 3. In the steady state, at what rate do k , k , y , K grow? Make sure to explain your answers. 4. Discuss the following statement: "Since in steady state, there is no growth, people are equally happy to live in an economy (in steady state) with a high or a low productivity growth

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