What would be the new steady state levels

Reference no: EM132136794

Question: The equation describing the evolution of capital stock per worker in an economy is the following:

K_t+1/N-K_t/N = sY_t/N-dK_t/N; where K is capital stock, N labor, Y output, s the saving rate and d the depreciation rate.

The production function expressed in per-worker terms is Yt/N = (K_t/N)^1/3.

(a) If s=0.1 and d=0.1, calculate the steady state levels of K/N and Y/N. Show your calculations. Provide a graphical illustration of your answer.

(b) If the saving rate (s) increased from 0.1 to 0.2, (other parameters remaining unchanged) what would be the new steady state levels of K/N and Y/N?

(c) Can an increase in the saving rate make the economy grow permanently at a higher rate? Explain your answer verbally and using a graphical illustration

Reference no: EM132136794

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