Question

Consider an economy where the production function is ? = ? 2 + 100. The savings...

Consider an economy where the production function is ? = ? 2 + 100. The savings rate in the economy is ? = 0.02 and the depreciation rate is ? = 0.2.

a. The economy starts in year 1 with ? = 20 units of capital. Compute the economy’s output, investment and depreciation in year 1.

b. What will be the economy’s capital stock in year 2?

c. Compute the economy’s output, investment and depreciation in year 2

d. What will be the economy’s capital stock in year 3?

e. Compute investment and depreciation for the levels of capital shown on the table. Capital Investment Depreciation

? = 0

? = 10

? = 20

? = 30

? = 40

? = 50

f. Graph the investment and depreciation functions below.

What is the steady-state level of capital in this economy? You may use your diagram to explain – No math needed.

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