Suppose that in the Solow growth model the saving rate is 30 percent (s=0.03), population growth...

Suppose that in the Solow growth model the saving rate is 30 percent (s=0.03), population growth rate is 2 percent (n=0.02), depreciation rate is 8 percent (d=0.08), and production fuction is F(K,N)=zK^0.4N^0.6.

a) Suppose that z=2. What is the steady state level of captial per worker and consumption per worker?

b) What is the level of golden rule savings and golden rule capital stock? At the golden rule capital stock, what is the level of consumption per worker?

c) Suppose there is a drop in z. Using a graph, show what happens to capital per capita in the new steady state. Moreover, explain what happens to the growth rate of aggregate GDP in the new steady state?

Thank you!

Expert Solution

Rahul Sunny answered 1 year ago

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