i need Question 2 solution Solow ModelConsider a Solow growth model like the one discussed in class, but incorporating thepossibility of less than full employment. Let t denote a period. The production function isY; = zK; [e,L]*¬,so that given the current TFP z4, the capital input K, and the labor input N = eL, firmsproduce output Y; in period t. Here e € [0, 1] denotes the proportion of the labor force Lthat is employed at each point in time. If e = 1 the economy is at full employment, withe = 0, on the other hand, everyone is unemployed. Total resources satisfyY; = C; + I,where C; denotes aggregate consumption, I aggregate investment, and Y; is GDP. Assumethat people invest a constant proportion s of their income, so that aggregate investmentsatisfiesIt = sY;and capital evolves according toK+1 = K,(1 – 8) + I,%3Dwhere ổ denotes depreciation. This function tells us how capital next period is related tocurrent capital, investment, and depreciation. In the book, you have seen the expressionwritten asAK = I – 8K,note that the two are equivalent. 1. Assuming that z4 = z and e = e are constant, compute the steady state value ofcapital per capita k* for this economy as a function of all the parameters of themodel. Remember that capital per capita satisfies k = 4, and that you will need totransform all variables into per capita terms.2. Let z4 = 1.3, s = 0.3, a = 0.35, e = 1 and ô = 0.07. What is the value of capital inthe steady state? Denote it by k*.?3. Does this value of s satisfy the golden rule? If yes, explain. If not, compute the valueof s that would.

Steady-state per worker capital refers to a concept used in economics to describe the long-term…

Answered: 2. Let z = 1.3, s = 0.3, a = 0.35, et =…

2. Let z = 1.3, s = 0.3, a = 0.35, et = 1 and 8 = 0.07. What is the value of capital in the steady state? Denote it by k*.?

14th Edition

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Chapter1: Making Economics Decisions

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