The Solow model with the government expenditure: Y₁ = K&L₁-a Yt= Ct +It+ Gt Kt+1 = It + (1 − 8) Kt - Lt+1 = (1 +n) Lt G₁ = oYt (a) Suppose Ct = (1 s) Yt, where s>o, as in the basic Solow model. Solve for capital per capita in the steady state. (b) Suppose that XG₁ (A = [0, 1]) is financed from households so that Ct (1 s) Yt - XGt. Find the steady state level of capital per capita. Explain the difference from the answer in (a). (c) Out of the government expenditure, proportion 6 € [0, 1] is invested in public capital formation. Hence, we suppose the same consumption function in (b) and the following capital accumulation Kt+1 = It + ØGt + (1 - 6)Kt. In what case the steady state level of capital per capita increases in o? Any policy implication?

The Solow model with the government expenditure: Y₁ = K&L₁-a Yt= Ct +It+ Gt Kt+1 = It + (1 − 8) Kt - Lt+1 = (1 +n) Lt G₁ = oYt (a) Suppose Ct = (1 s) Yt, where s>o, as in the basic Solow model. Solve for capital per capita in the steady state. (b) Suppose that XG₁ (A = [0, 1]) is financed from households so that Ct (1 s) Yt - XGt. Find the steady state level of capital per capita. Explain the difference from the answer in (a). (c) Out of the government expenditure, proportion 6 € [0, 1] is invested in public capital formation. Hence, we suppose the same consumption function in (b) and the following capital accumulation Kt+1 = It + ØGt + (1 - 6)Kt. In what case the steady state level of capital per capita increases in o? Any policy implication?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

1. The Solow model with the government expenditure:
Y; = KÇ L;-a
Y = C; + It + G;
K41 = I4 + (1 – 8)K;
Lt+1 = (1+n)L4
G = oY;
(a) Suppose Ct = (1 – s) Y4, where s > o, as in the basic Solow model. Solve for
capital per capita in the steady state.
(b) Suppose that AG (A e [0, 1]) is financed from households so that Cr
(1 – s) Y – AG. Find the steady state level of capital per capita. Explain
the difference from the answer in (a).
(c) Out of the government expenditure, proportion o € [0, 1] is invested in public
capital formation. Hence, we suppose the same consumption function in (b)
and the following capital accumulation
K+1 = I; + OG; + (1 – 8)K;.
In what case the steady state level of capital per capita increases in o? Any
policy implication?
(d) Suppose that the economy is initially under dynamic inefficiency and o = 0.
Under the setting of (c), how can you achieve the golden rule by a fiscal policy?
When solving this question, we consider government consumption, (1 – ø)G,
contributes welfare through public services. Then the golden rule level of cap-
ital maximizes the total of private and government consumptions.

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