Question

In: Economics

If a country has the following traits: y = 5k½marginal propensity to save = 0.4depreciation rate...

If a country has the following traits: y = 5k½marginal propensity to save = 0.4depreciation rate = 3%population growth rate = 5%

(a) What is the steady-state level of y?

(b) What is the steady-state level of c?

In the question above, if k began a period being 400, what would the amount of:

(a) depreciation taking place during that period?

(b) net investment taking place during that period?

Solutions

Expert Solution

At steady state level of capital , growth in capital stock is equal to zero. Here, investment gets equal to net depreciation.

At steady state,

savings rate / (depreciation rate + population rate) = Steady state level of capital / Steady state level of output

0.4 /(0.03+0.05) = k / 5k

k = 625 units

y = 125 units

2. Consumption = Total output - Investment

= 125 - (0.4 125)

= 75 units

3. Gross investment = Saving rate output

= 0.4 125

= 50

If k = 400, then net depreciation = (Depreciation rate + population rate ) capital stock

= (0.03+0.05) 400

= 32

Output = 5k = 520 = 100 units

Net investment = Gross investment - Net depreciation

= ( Saving rate output )- 32

= 0.4 100 - 32

= 8 units

Rahul Sunny answered 1 year ago

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