Question

Use the Solow model to solve. Suppose, you are the chief economic advisor to a small African country with an aggregate per capita production function of  y=2k^1/2_. Population grows at a rate of 1%. The savings rate is 12%, and the rate of depreciation is 5%.

(a) On a graph, show the output, break-even investment, and savings functions for this economy (as a function of capital per worker). Denote steady-state capital per worker k^* and steady-state output per worker y^*. Label the graph completely

(b) What is the numerical value of this economy’s steady-state level of capital per worker? Output per worker? Show all necessary steps in computation.

(c) If capital per worker equals two units (k=4), explain how the economy works its way toward the steady state. Explain in words.

(d) How fast is output per worker in this economy growing in the long run? Explain

Answer 1