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# Quiz3Banswer - ECO 420-002 and 004 Fall 2008 Quiz 3B On my...

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ECO 420-002 and 004, Fall 2008 Quiz 3B On my honor, I have neither given nor received unauthorized aid on this quiz: ______________ Name:___________________________________________ Section: _______________ 1. Consider the per effective worker production function y=k 1/2 If the population is growing at 2%, the depreciation rate is 0.05, saving rate is 0.40 and the growth rate of technology is 0.03, a. Calculate capital per effective worker in steady state. (4 points) sf(k) = (δ+n+g)k sk 1/2 = (δ+n+g) k* =(s/( δ+n+g)) 2 = (0.40/(0.05+0.02+0.03)) 2 = 16 b. Calculate output per effective worker in steady state. (2 points) y=16 1/2 = 4 c. Find the golden level of capital and output per effective worker.(4 points) MPK = (δ+n+g) 1/2k -1/2 = (0.05+0.02+0.03) = 0.10 k -1/2 = 0.26 k = 1/0.16 = 5 k* gold = 5 2 = 25 d. What type of policy should this country pursue to attain the Golden State?(2 points) This country has a steady state equilibrium that is below the Golden State. This country should pursue policies to promote saving. Public saving can be increased by reducing deficit spending. Private saving can be increased by providing tax incentives for saving such as tax-deferred retirement plans, tax-free interest bonds and so on.

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Quiz3Banswer - ECO 420-002 and 004 Fall 2008 Quiz 3B On my...

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