Question

Answer the following questions using the basic Solow growth model, without population growth or technological progress....

Answer the following questions using the basic Solow growth model, without population growth or technological progress.

(a) Draw a diagram with per worker output, y, consumption, c, saving, s and investment, i, on the vertical axis and capital per worker, k, on the horizontal condition. On this diagram, clearly indicate steady-state values for c, i, and y. Briefly outline the condition that holds in the steady- state (i.e. what is the relationship between investment and the depreciation of capital?).

(b) Suppose that society becomes less thrifty, resulting in a lower rate of savings, s. Using the above diagram, how does the new steady-state capital stock per worker, k, compare to the stock in part (a)? How does output per worker compare? How does consumption per worker compare? [Note: Even if output per worker decreases, consumption per worker need not decrease. Why not?]

(c) Suppose that the saving rate decreases at time t0. On a graph plot c, k, and i against t and show how the economy adjusts between the original and the new steady-state. Briefly explain why each variable is changing in the way that you have drawn it in your diagram.

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