Consider the Solow growth model. Suppose that F(K, N) = zK^a N^1-a, where a = 0.3. Also, assume that capital depreciation rate is 10% (that is d = 0.1), savings rate is 25% (that is s = 0.25), populations growth rate is 2% (that is n = 0.02), and z = 2. • First, determine capital per worker, income per capita, and consumption per capita in the steady state. • Second, assume that the savings rate has increased to 40% but the total factor productivity decreases to 1. Discuss the effect of savings and productivity on the steady state level of consumption per work
Consider the Solow growth model. Suppose that F(K, N) = zK^a N^1-a, where a = 0.3. Also, assume that capital depreciation rate is 10% (that is d = 0.1), savings rate is 25% (that is s = 0.25), populations growth rate is 2% (that is n = 0.02), and z = 2. • First, determine capital per worker, income per capita, and consumption per capita in the steady state. • Second, assume that the savings rate has increased to 40% but the total factor productivity decreases to 1. Discuss the effect of savings and productivity on the steady state level of consumption per work
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider the Solow growth model. Suppose that F(K, N) = zK^a N^1-a,
where a = 0.3. Also, assume that capital
is 25% (that is s = 0.25), populations growth rate is 2% (that is n = 0.02), and z = 2.
• First, determine capital per worker, income per capita, and consumption per capita in the
steady state.
• Second, assume that the savings rate has increased to 40% but the total factor productivity
decreases to 1. Discuss the effect of savings and productivity on the steady state level of
consumption per worker.
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