This is a calculation question involving the Solow model. There are three parts to the question....

This is a calculation question involving the Solow model. There are three parts to the question. Part (a) asks for the steady state level of k for a 'Solow country.' Part (b) asks for the steady-state level of y for the same country. Part (c) asks you to calculate a new savings rate for the country to satisfy certain conditions. You have to answer all three parts of the question in the box provided. Please make it clear what part of each question you are answering. If you send me a pdf of your calculations by 11:59 pm tonight, I will use it to assign partial credit for your answer (in the event that your answer is not completely correct).

(a) The nation of Millenia has a Solow production function of y = 60k1/2, a savings rate of .20, a population growth rate of .03, and its capital depreciates at the rate of .05. Using this information, and the characteristic equation of the Solow growth model, calculate the steady state level of k for Millenia.

(b) Based on the information given above, calculate Millenia's steady state level of y.

(c) After Millenia reached the steady state that you calculated in (a) and (b), tragedy struck. A civil war broke out to the east of Millenia, and refugees coming across the border raised Millenia's population growth rate to .05--a rate that will continue for the forseeable future. (As a Solow expert, you know that this increase in population growth will decrease Millenia's steady state level of income). Assume that Millenia's production function and depreciation rate are unchanged. What is the new savings rate that Millenia must achieve to return to its old steady state (the one you calculated in (a)), now that population growth = .05? (HINT: draw a diagram and think about this problem before you start tossing around equations. If you understand the model, the calculations are trivial)

Expert Solution

i hope u will be satisfy with this ans.

Rahul Sunny answered 1 year ago

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