Question

Question #1: The Basic Solow Model

Consider an economy in which the population grows at the rate of 1% per year. The per worker production function is y = k6, where y is output per worker and k is capital per worker. The depreciation rate of capital is 14% per year. Assume that households consume 90% of their income and save the remaining 10% of their income.

(a) Calculate the following steady-state values of

(i) capital per worker

(ii) output per worker

(iii) consumption per worker

(iv) investment per worker

(b) Suppose that the savings rate in the economy increases to 12%. Assume that all other variables are held constant. Calculate the following steady-state values of

(i) capital per worker

(ii) output per worker

(iii) consumption per worker

(iv) investment per worker

(c) Suppose that the country wants to increase its steady-state level of output per worker. What would the steady-state level of capital per worker would be needed in order to double the level of output per worker that you found in Part (a)?

(d) What would the savings rate have to be in order to double the level of output per worker that you found in Part (a)?

Question #2: Solow Model (Graphing Examples)For each of the following examples use the basic Solow Model to graphically illustratehow each of the following would affect capital per worker in the long-run (the steady-state level).

(a) A tsunami destroys a portion of a nation’s capital stock, but has no effect on the population (L) or on the growth rate of the population (n).

(b) A country experiences an increase in the birth rate.

(c) There is a decrease in the savings rate.

(d) Because of an increase in pollutants in the air, the rate of capitaldepreciation rises.

Answer 1

Answering only question 1)