1 Consider the following example for the Solow Growth model. Suppose that F(K, N) = K'N? The depreciation rate, d = 0.05; the savings rate, s = 0.2 ;...
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1 1 Consider the following example for the Solow Growth model. Suppose that FIX, N] = KENE
The depreciation rate, d = 0115; the savings rate, 5 = 0.2; the population growth rate, a = 0111 ;
and the total factor productivity, 2 = l . a. Calculate the steady state per capita capital stock, It” . h. Calculate the steady state per capita consumption, 0'. e. Let us assume that at the beginning of period zero the economy is at its steady state
and the total number of persons in the economy is lflflfl. Determine the aggregate
quantifies of capital stock, consumption and output (K, C, and Y) for years ] to 3. d. A student argues that one can raise the steady state per worker consumption either by lowering or raising the savings rate. However hefshe cannot tell what value of the
savings rate could give himfher the highest value of e' . Given the above economy, find the highest level of c” along with the associated Golden rule savings rate, 5.
e. Suppose the depreciation rate increases exogenously. How will this afl‘ect the optimal savings rate? Explain.

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