Consider the Solow Growth model, and assume there is no technological change. The production function is...

Consider the Solow Growth model, and assume there is no technological change. The production function is F(K,L) = K^aN^1−α, α = 1/3. Population growth rate n = 0.01. Capital depreciation δ = 0.09. Savings rate s = 0.4.
(a) Write down the law of motion for capital per worker.

(b) Compute the steady state capital per worker and output per worker.

(c) Suppose a book called Let’s Party Like There is No Tomorrow reduces the nation’s savings rate to 0.35. The change in saving behavior is temporary, and the saving rate will restore to 0.4 after two years. Explain how output per worker changes in the short run and in the long run.

(d) Suppose a book called Let’s Party Like There is No Tomorrow: This Time For Real permanently reduces the nation’s savings rate to 0.35. Does consumption in the steady state increase or decrease? By how much? (For those who want more entertainment: Is the result expected? Why or why not?)

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Rahul Sunny answered 1 year ago

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