Reference no: EM133083523
Imagine an economy with a production function Y = KαL1-α. Consumption is equal to C = (1 -s)Y and the savings rate is s = 14. The rate of population growth is n = 3% and the depreciation rate is δ = 5%.
1. Write down an expression for output per capita y.
2. Derive the fundamental equation of Solow-Swan starting from the National Income Identity (Y =C + I, where I represents investment).
3. Imagine that α = 0.5. In the long run, what is the growth rate of output per capita y? In the longrun, what is the growth rate of total output Y ?
4. In the long run, does this economy reach a constant level of capital per capita k, output per persony and consumption per capita c? If so, what are their values? If not, why not?
5. Imagine that the depreciation rate increases from 5% to 10%. If the economy is initially at itssteady state, what are the effects on the level and growth rates of k, y and c in the long run?
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