Question

Create an excel program that describes how the economy moves to the steady state given the following values: savings rate = 0.3, depreciation rate (δ) = 0.1, A=1, and the initial capital labor ratio (k) = 4. Use the Cobb-Douglas production function Y = AL1/2K1/2 or y = k0.5

a) Show graphically the movement to the steady state and explain intuitively the behavior of the series.

b) Suppose the savings rate increases to 0.4. Recalculate the movement to the steady state and describe the differences compared to (a) both graphically and intuitively.

c) Include n= 0.1 and g = 0.005 and explain intuitively how the introduction of these variables affects the steady state. Explain how the movement to the steady state has changed.

d) Suppose total factor productivity, A, increases to 1.2 in period 40. Explain intuitively and computationally the impact on k and y

Answer 1