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Scan 120250014 - Question Number Three STEADY STATE GROWTH...

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Unformatted text preview: Question Number Three STEADY STATE GROWTH EQUILIBRIUM, the Solow Model, and THE GOLDEN RULE Chapters #7 and #8 You are the boss of an economy that has already reached steady state growth eguilibrium. Your worker labor efficiency is growing at a four percent (4%) annual rate. Your labor (“L”) force is growing at a two and one-half percent (2.5%) annual rate. The annual depreciation fate of your capital stock per worker is eight and one-half percent (8.5%). Also your economy is operating at a level at which the return on capital per effective worker (MPK) is NINETEEN percent (19%). Your challenge is to set your economy on a path toward a new steady state growth equilibrium that is the golden rule steady state. This is the steady state (of all possible steady states) that gives maximum consumption to each worker in the economy. Hint: Remember, each rate of saving in your economy pushes the economy toward a unique steady state level of income per worker. One of these steady states is the golden rule steady state. PLEASE DESCRIBE THE THEORETICAL LOGIC BEHIND YOUR ANSWERS. Be as detailed as you think necessary. ' (1) Before taking any action, is your economy at a steady state whose output per effective worker is above or below the steady state associated with the golden rule steady state? WHY? (5 points possible) (2) Given your answer to (1), what must you do to push your economy toward a steady state that is the golden rule steady state? How do you propose to do it? EXPLAIN. (8 points possible) (3) What happens to the value of the MPK as your approach the golden rule steady state? WHY? (8 points possible) (4) Once you reach the golden rule steady state, what is the value of the MPK, and what is the growth rate of REAL INCOME PER EFFECTIVE (EFFICIENT) WORKER, (Y/L*E), at the golden rule steady state? (8 points possible) (5) What is meant by the term “Golden Rule” in the statement “Golden Rule Steady State”? What is the relevance of the term “Golden Rule” to your answers above? (6 points possible) ...
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