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Consider the simple version of the Solow model, with no population growth and no technological change....

Consider the simple version of the Solow model, with no population growth and no technological change. Suppose that, due to an aging capital stock, an economy experiences a sudden increase in its depreciation rate.

a. Show the impact of an increase in the depreciation rate to ? ′ > ? on the diagram.

b. What happens to the steady-state level of capital? _______

c. What happens to the level of output in the steady state? _______

d. Assuming that the depreciation rate stays at its new, higher level, what action could the economy undertake to restore the initial steady-state level of capital and output?

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