Country A and Country B both have the production function Y = F(K,L) = K¹/32/3 Assume that neither country experiences population growth or technological progress and that 20 percent of capital depreciates each year. Assume further that country A saves 10 percent of output each year and country B saves 30 percent of output each year. Now suppose that both countries start in year 1 with a capital stock per worker of 1. In what year will consumption in country B be higher than consumption in Country A? An excel spreadsheet may help simplify your calculation. You will need to round your calculations to 3 decimal places. 5 6 7

Suppose that the TFP parameter, As, in the Solow production function is the same across countries. What differs across countries is their savings rate, s. For the 1750 starter its savings rate is .25. Find the savings rate for a country that switches to Solow in 1950. Use the calibrated parameters from class. Also, assume the same population growth function holds in the 1750 starter and the 1950 starter.

Give typing answer with explanation and conclusion

Exhibit 2-18 Production possibilities curves CONSUMPTION GOODS PRODUCTION Year X B CAPITAL GOODS PRODUCTION Year Y In Exhibit 2-18, the production possibilities curves for a country are shown for Year X and Year Y. Suppose this country was located at point A in Year X and point B in Year Y. This country: O is producing the same number of capital goods in both years. O is producing the same number of consumption goods in both years. O has shown no growth between Year X and Year Y. Ohas higher unemployment in Year X than in Year Y.

Q5 Suppose in a Solow model, we have the following parameter values: n = 0, s = 0.5, a = 0.3. There is no growth in the total factor productivity so that A, = A = 1. Moreover, we know that at time 0, the economy is at a steady state so that k = k, =1. Now imagine that a foreign power invaded this %3D country. 1% of the population was killed and another 14% of the population fleeded the country to avoid violence. Moreover, 15% of capital stocks were destroyed. All of this happens in period t=1. After that, the war ended and there was no more destruction of capital or loss of population (but the refugee permanently settled outside of the country and will never return0. What is the growth rate of per-capita output in period t =4?

Assume the economy is initially in its balanced growth state. Suppose policymakers pursue policies that would increase the saving rate to s1=0.3. Draw a carefully-labelled diagram to illustrate the effect of the change in the saving rate on the economy in the long run. Explain the effect of the change in saving rate on steady-state capital per effective worker and steady-state consumption per effective worker?

1. Consider Avataria, which can be described by the Solow model with the population growth. Its production function Y(K,L) = 2K¹2 L¹/2 Its investment rate is 40%, its depreciation rate is 10%, and its population growth rate is 10%. Calculate the capital-labor ratio, output per worker, and consumption per worker in the steady state. Assume that now the population growth slows down to 4%. What happens with the output per worker and consumption per worker in the new steady state? Calculate the exact values. (a) (b)

In a Solow economy with technological progress, the production function is given by: Y = KO.5(LE)0.5. Furthermore, the saving rate of this economy is 0.2. The population growth rate is 0.03. The depreciation rate is 0.01. The technological progress is given by g which is equal to 0.01. Define y = Y/LE and k = K/LE. a) Find out the steady state values of k (i.e.: k*) and y (i.e.: y"). 2. Ay Ak AY ΔΚ b) Find out the values of and in the steady state. K y'k'Y

Q8. Assume a closed economy. Suppose the capital-output ratio is 3, the depreciation rate is 3%, and the gross savings rate is 10%. Use the Harrod-Domar growth equation to determine the rate of growth in total output. What would the gross savings rate have to be to achieve 5% growth? Why is capital the only factor of production in the Harrod-Domar model? Compare the assumptions made about the production function in the Solow model and the Harrdo-Domar model.

3) Suppose your per capita production function is given as y = k". Capital evolves according to the expression Ak = sy – (n +d)k, and your consumption function is c = (1– s)y. As usual, s is the savings rate, n is the - population growth rate and d is the capital depreciation rate. Imagine a foreign government decides to grant your country an investment subsidy in the form of b, which represents a constant fraction of domestic investment per capita (ia) such that irotal = ia + bia. In per capita terms the expenditure function with the subsidy is y = c + itotal and it is y = c + ia without the subsidy. a) Derive an expression for the steady state capital stock after the subsidy is granted. (Hint: Use the expenditure function with the subsidy to solve for sy then use the expenditure function without the subsidy to solve for domestic investment ia.) b) Use the Solow diagram to show living standards before and after the subsidy is granted. Explain the dynamic process towards the new steady…