Find the steady state level of output per capita

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1. In the basic Solow growth model (no population growth, no technological progress), we assumed that investment is a constant fraction of output. Suppose that in the country of EastLand the production function is y = k^0.6

Suppose that the saving rate in EastLand has always been 0.6 but that, due to a change in government policy in period T , citizens switch permanently to a saving rate of 0.4. Use a graph to describe the paths of (log of) output per person, (log of) consumption per person, and (log of) investment per person. Make sure that your graph includes period T as well as periods before and after T .

2. Under the assumptions of Solow's growth model, suppose that the production function is given by y = k^0.5 the saving rate is s = .4, the depreciation rate is 10%, and the rate of growth of the population is 0%.

(a) Find the steady state level of output per capita? What is the rate of growth of total output Y when the economy is at the steady state?

(b) Assume now that the population grows at a constant rate of 5%. Find the steady state level of output per capita. What is the rate of growth of total output Y when the economy is at the steady state

Reference no: EM133439585

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