Question

Consider the standard Solow model with saving rate is 30%, and depreciation rate is 5%, Cobb-douglas production function with A = 1, α = 0.3.

Suppose initially the economy is at the steady state. If we increase the saving rate from 30% to 50% once for all.

Plot the first 20 periods of the following after the change:
• capital sequence • output sequence • consumption sequence

Answer 1

Consider the standard solow model with saving rate is 30%, depreciation rate is 5% cobb Douglas production function with A= 1,= 0.3

Suppose initially the economy is at the steady state. If we increase the saving rate from 30% to 50% once for all.

Plote the first 20 periods of the following after change

• capital sequence • output sequence • consumption sequence

Given :

Saving rate = 30% = sf(k) = sy

Depreciation= 5%=k

A= 1 , =0.3

Production function = Q= A K L

Q = K 0.3 L 0.7

∆K = investment - depreciation

= 30 % - 5% = 25 %

in 2nd case ∆ K = 50 - 5= 45%

​​​​​​as a result of increases in investment curve shift upward and a new equilibrium established and where k1 k*

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