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Unformatted text preview: s in capital Page 22 of 52 Jessica Gahtan Prof: Mokhles Hossain Macroeconomics ECON2000 Fall 2013 decrease consumption, so k* must be above the golden Rule level. Therefore, at the Golden Rule, MPK – δ = 0. The economy does not gravitate toward the Golden Rule steady state. If we want any particular steady state capital stock, such as the Golden Rule, we need a particular saving rate to support it. Transition to the golden rule steady state Starting with too much capital: the policymaker should pursue policies aimed at reducing the rate of sa ving in order to reduce the capital stock. The reduction in the saving rate causes an immediate increase in consumption and a decrease in investment. Investment will now be less than depreciation, so the economy is no longer in a steady state. Capital stock falls, leading to reductions in output, consumption, and investment. These variables continue to fall until the economy reaches the new (Golden Rule) steady state. If it is the golden rule steady state, consumption must be higher than it was before the change in saving rate, even though output and investment are lower. When capital stock exceeds the Golden Rule, reducing saving is clearly a good policy, for it increases consumption at every point in time. Starting with too little capital: when the policymaker begins with less capital than in the Golden Rule steady state, he must raise the saving rate. The increase in saving rate cause an immediate fall in consumption and a rise in investment. As capital accumulates, output, consumption, and investment gradually increase, eventually approaching the new steady state levels. The increase in saving eventually leads to a higher level of consumption than before. Therefore, achieving the new steady state requires an initial period of reduced consumption. When the economy begins below the Golden Rule, reaching the Golden Rule requires initially reducing consumption to increase consumption in the future. Requires a tradeoff among the welfare of different generations. Introducing population growth: The change in the capital stock per worker is now given as: Δk = sf(k) – (δ+n)k New investment increases k whereas depreciation and population growth decrease k. Think of (δ+n)k as defining break even investment, the amount of investment...
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This test prep was uploaded on 03/28/2014 for the course ECON 2000 taught by Professor Henriques during the Fall '10 term at York University.
 Fall '10
 Henriques
 Macroeconomics

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