How will the economy repay this debt

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Consider the baseline neoclassical growth model with no population growth, no technological change, and preferences given by the standard CRRA utility function (8.49). Assume, however, that the representative household can borrow and lend at the exogenously given international interest rate r∗. Characterize the steady-state equilibrium and transitional dynamics in this economy. Show that if the economy starts with less capital than its steady-state level, it will immediately jump to the steady state by borrowing internationally. How will the economy repay this debt?

Reference no: EM131139760

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