Y7

Consider the Solow model that we had in class and suppose that TFP does not grow, i.e., g : 0. A steady state for this model is dened as a level of capital-per-capita that is stationary. In other words, if capital-per-capita is at its steady state level, is, at period t, then it will stay at k, at t + 1 and so on and on. A Use the law of motion for capital and write an equation for [6,. Find all solutions of this equation; your answer should depend on the level ofTFP (remember that it is not changing), saving rate, emp.-pop. ratio, and depreciation rate. How many steady states are there? Which ones are reasonable? B What is the steady state level of GDP-per-capita? C Consider an economy that is in steady state and is hit by war that leads to a major de- struction of capital. Qualitatively, plot the evolution of GDP-per-capita over time in this economy. On the x-aXis you should have time and on the y-axis, you should have GDP- per-capita