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Unformatted text preview: Economics 314 Suggested Solutions to HW 3 February 11, 2009 1. a If you double L (0) , then by the formula for steady state per capita capital k & = ( sA n + & ) 1 1 & & , we can easily check that k & is not a/ected by change in L (0) , which means K & must rise exactly by the same amount to o/set the e/ects of a rise in L (0) : Because of CRS production function, we can say that K & rises by the same amount as the rise in L (0) to o/set any e/ect on k & : b If the economy is in steady state, then the long run growth rate is zero, irrespective of the value of n . But if n > , then the per capita output decreases, since there are more and more people to share the pie. c See Barro page 78. d Solow model predicts conditional convergence. So subject to the fact that the economies under consideration have the same para- meter values n; s; A; & and , the economies converge to the same steady state k & . For the 112 economies here, we are not sure whether the relevant parameters are the same or not. So we can- not say that this &nding conicts the &nding of the Solow model. 2. Economy 0: K = 50 ; A = 2 , & = 0 : 5 , = 0 : 9 , L = 100 , n = 0 , s = 0 : 5 Economy 1: A = 4 , all other parameters same as economy 0....
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