Question 1. The Solow Model of Economic Growth f) In the steady state equilibrium, what will be the numerical values of…
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Question 1. The Solow Model of Economic Growth

f) In the steady state equilibrium, what will be the numerical values of the growth rates
of aggregate output, the aggregate capital stock, aggregate investment, and aggregate
savings? What will be the numerical values of the growth rate of output per worker, and capital per worker? What will be the numerical values of the growth rate of
output per effective labor unit and capital per effective labor unit?

g) What would be the qualitative impact of an increase in s for the steady state level of
capital per effective worker and output per effective worker? Show this in a diagram.

h) What would be the qualitative impact of an increase in s for the steady state growth
rates of output, capital, savings and investment? What is the impact of an increase in
s for output per worker?

i) What factors will cause a change the steady state growth rate of this economy? What
types of policies would a government have to enact to increase the steady state
growth rate of the economy? Would an increase in the steady state growth rate of the
economy increase living standards in the steady state? Explain carefully.

Question 2. More on the Solow Growth Model
a) Re-do Question 1, parts b) through d), assuming that the production function is given
by = 0.3 ( )0.7 (1�)

b) If the production function is given by (1�) how does this affect your answers to
Question 1 parts e) through i), if at all?

c) Derive expressions for the steady state level of capital per effective worker and output
per effective worker for the case where the production function is given by (1) and
the case where it is given by (1�).

d) Assume that depreciation is 10 percent per year, and the savings rate is twenty
percent. What are the steady state levels of capital and output per effective worker
for the case where the production function is given by (1) and the case where it is
given by (1�). Compare them and explain in words how and why they are different, if
they are.

e) Now assume that the savings rate increases from twenty percent to thirty percent.
How does this affect the steady state levels of capital and output per effective worker
when the production function is given by (1) and when it is given by (1�). Compare
them and explain in words how and why they are different, if they are.

f) Now assume that the growth rate of technological change increases from 2 percent to
3 percent per annum. How does this affect the steady state levels of capital and output per effective worker when the production function is given by (1) and when it is given
by (1�). Compare them and explain in words how and why they are different, if they

are.

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