Question

An economy has the following Cobb-Douglas production function:

Y = K^a(LE)^1-a

The economy has a capital share of 1/3, a saving rate of 24 percent, a depreciation rate of 3 percent, a rate of population growth of 2 percent, and a rate of labor-augmenting technological change of 1 percent. It is in steady state.

a. Does the economy have more or less capital than at the Golden Rule steady state? How do you know? To achieve the Golden Rule steady state, does the saving rate need to increase or decrease?

b. Suppose the change in the saving rate you described in part the previous question occurs. During the transition to the Golden Rule steady state, will the growth rate of output per worker be higher or lower than the rate you derived in the previous steady state?

c. Suppose the change in the saving rate you described in part the previous question occurs. After the economy reaches its new steady state, will the growth rate of output per worker be higher or lower than the rate you derived in the previous steady state?

Answer 1