The Harrod - Domar growth model is a simple macroeconomic growth model that states that investment is proportional to change in income:/= 3.5(Y-Y.,), where I, is the investment at the time - period r (in 5 million) Y, and Y., are the income at the time-period / and 1-1, respectively (in $ million) 3.5 is the capital-output ratio (constant). The savings at the time-period / depends on the proportional share of income: S, -0.25Y, where S, is the saving at the time - period ( in $ million) 0.25 is the average saving rate (constant). Investment and savings must be equal in any period so that the equilibrium condition can be written as 1, S, Using the assumptions above answer the following questions: (a) Write the equilibrium equation as a difference equation in Y, using the equilibrium condition provided above. (b) Solve the difference equation that you derived in (a), assume that given Y = $9.5 million. (c) Comment on the stability of the system.

The Harrod - Domar growth model is a simple macroeconomic growth model that states that investment is proportional to change in income:/= 3.5(Y-Y.,), where I, is the investment at the time - period r (in 5 million) Y, and Y., are the income at the time-period / and 1-1, respectively (in $ million) 3.5 is the capital-output ratio (constant). The savings at the time-period / depends on the proportional share of income: S, -0.25Y, where S, is the saving at the time - period ( in $ million) 0.25 is the average saving rate (constant). Investment and savings must be equal in any period so that the equilibrium condition can be written as 1, S, Using the assumptions above answer the following questions: (a) Write the equilibrium equation as a difference equation in Y, using the equilibrium condition provided above. (b) Solve the difference equation that you derived in (a), assume that given Y = $9.5 million. (c) Comment on the stability of the system.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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