Week5Solow-sol
.pdf
School
New York University Stern School of Business**We aren't endorsed by this school
Course
EGB 11
Subject
Economics
Date
Dec 17, 2024
Pages
2
Uploaded by MagistrateWallaby3390
Fall 2024__________________________________________________________________________________________________Solow Model and Policy 1.The Solow Model and the Golden Rule.In this question we will discuss the role of some government policies in the Solow Model. Consider a hypothetical country with per-worker production y= k1/2, where yis output per worker and kis capital per worker. Assume also that 10 percent of capital depreciates per year. a.Assume the savings rate (s) is 0.4. Compute the capital per worker, output per worker and consumption per worker in the steady state. b.If the initial capital stock of the economy k=12. What do you expect to happen with k over time? Explain in detail. =-1-*=(5)=(4)"-16ins.S:sf)=Sk*=k*=(3)Fay*=k*2=16"=4c*=(1-0.4)y*=0.6x4=2.4six=1.6=Sxy*=Sk*Iwillincreaseovertime(sotheeconomyuntilitreachesK*=16willbegrowing-
Fall 2024__________________________________________________________________________________________________c.Explain the effect of an increase in s in the steady state of the economy. In particular, describe the impact on k, y and c in the steady state. d.Suppose the government wants to influence the savings rate in the economy. How should the government choose the best savings rate? k*since(y*=k*"24ask**=A)y*impactundeterminedont"best"savingsrateistheonethatgiveshighestf(ka)=8=)((k)"=0.1c(GoldenRule↓f(k)=k"z=)f((k)=-k"12#k*=25k*=(3)=25=(y=k2"2=5=Sa=0.5C=(l- s) yk=0.5x5=2.5PS:Keisthegoldenrulek*A