ECON311HW4Solutions

ECON311HW4Solutions - PS4 Answer key: Exercise 1 a.) The...

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Unformatted text preview: PS4 Answer key: Exercise 1 a.) The key equation in the Solow model is ∆g = G¡ − (¢ + £)g In SS, ∆g = 0 ¤ G¡ = (¢ + £)g 0.3(3g ¥.¦ ) = 0.1g 0.9 = 0.1 g g ¥.¦ g ∗ = 81 SS output per worker is: ¡ ∗ = 3(g ∗ ) ¥.¦ = 27 SS consumption per worker: § ∗ = (1 − G)¡ ∗ § ∗ = (1 − 0.3)27 = 18.9 b.) ss k : 0.4(3g ¥.¦ ) = 0.1g g ∗ = 144 ss y: ¡ ∗ = 3(g ∗ ) ¥.¦ = 36 ss c: § ∗ = (1 − 0.4)36 = 21.6 The higher is the saving rate, the higher the ss value for the ss k * and y * . On the other hand, increasing the saving rate has two effects on c: First, since y * is higher, § ∗ should also be higher since § ∗ = (1 − G)¡ ∗ Second, a higher s, decreases § ∗ because of the first term on the right of the previous equation. The level of s that makes consumption the highest possible in SS is given by the golden rule. c.) ss k : 0.4(3g ¥.¨ ) = 0.1g g ∗ = 34.8 ss y: ¡ ∗ = 3(g ∗ ) ¥.¦ = 8.7 ss c: § ∗ = (1 − 0.4)36 = 21.6 Exercise 2...
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This homework help was uploaded on 04/18/2008 for the course ECON 311 taught by Professor Gordon during the Winter '08 term at Northwestern.

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ECON311HW4Solutions - PS4 Answer key: Exercise 1 a.) The...

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