Question

Use information to answer questions below.

Y = f(k) = k^a, where a = 0.25

S = 0.3

δ = 0.2

n = 0.05

g= 0.02

a. Find the steady state capital per effective worker, output per effective worker, investment per effective worker, and consumption per effective worker.

b. Find the steady state growth rate of capital per worker, output per worker, investment per worker, and consumption per worker.

c. Find the steady state growth rate of capital, output, investment, and consumption.

d. Show using two separate graphs the effects on the Solow growth model (i) an increase in the savings rate, and (ii) and an increase in depreciation rate, the population growth rate, or the technological growth rate.

Answer 1

When there is an increase in the savings rate , this will shift the investment function upward . As a result, steady state capital per effective worker increases and output per effective worker increases.

When there is increase in depreciation rate , population growth rate or technological growth rate then the break even investment line tilts upwards . As a result, steady state capital and output per effective worker decreases.