Quick%20Quiz%2016%21

# Quick%20Quiz%2016%21 - s = 0.2 k/y = 2.5 δ = 0.04 α = 0.3...

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© Hadi Salehi Esfahani Quick Quiz 16! According to the neoclassical model of economic growth with a Cobb-Douglas production function, the growth rate of capital per effective unit of labor is given by k/k = sk  1  ( + n + g ). For the US economy, s = 0.2, k/y = 2.5, δ = 0.04, α = 0.3, and the long-run real GDP growth is n + g = 0.03. Assume that the economy has reached its steady state, k/k = 0. 1. What is the value of steady-state capital per EUL, k* ? 2. If the savings rate drops to s = 0.15, what would be k/k this year? 3. If the savings is kept at s = 0.15 for a long time, what would be the steady state value of k* under that situation?

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© Hadi Salehi Esfahani Solution to Quick Quiz 16! According to the neoclassical model of economic growth with a Cobb-Douglas production function, the growth rate of capital per effective unit of labor is given by k/k = sk  1  ( + n + g ). For the US economy, s = 0.2, k/y = 2.5, δ = 0.04, α = 0.3, and
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Unformatted text preview: s = 0.2, k/y = 2.5, δ = 0.04, α = 0.3, and the long-run real GDP growth is n + g = 0.03. Assume that the economy has reached its steady state, k/k = 0. 1. What is the value of steady-state capital per EUL, k* ? Since k/k = sk 1 ( + n + g ) = 0.2 k 0.7 (0.04 + 0.03) = 0 k* = (0.2/0.07)1/0.7 = 4.48 2. If the savings rate drops to s = 0.15, what would be k/k this year? © Hadi Salehi Esfahani Solution to Quick Quiz 16! 3. If the savings is kept at s = 0.15 for a long time, what would be the steady state value of k* under that situation? Since k/k = sk 1 ( + n + g ) = 0.15 k 0.7 (0.04 + 0.03) = k* = (0.15/0.07)1/0.7 = 2.97 The steady state capital stock drops by one-third! ( k 2 * / k 1 * = 0.66) Because y = k , ( y 2*/ y 1*) = ( k 2*/ k 1*) = 0.884 income would go down by 11.6 percent....
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