6. Characteristics of the Golden Rule steady state Aa Aa The table below present

Question

6. Characteristics of the Golden Rule steady state Aa Aa The table below presents the steady-state values of capital per worker (k*), output per worker (y*), and consumption per worker (c*) that result from various saving rates in an economy that corresponds with the Solow model without population growth. The Golden Rule steady-state capital per worker (k*gold) is 81 units Use your understanding of the Solow model to complete the missing element in the table below. 46 81 134 18 27 39 6.30 6.75 The Golden Rule saving rate for this economy is The depreciation rate in this economy is (Note: The depreciation rate is the same for all rows, but use the second row for your calculations, as these values have not been rounded.) When k* is 41 units, the marginal product of capital is the depreciation rate

Explanation / Answer

Answer

Golden Rule level of Capital = 81 and according to Table above Corresponding to k* = 81, y* = 27 and

c* = 6.75

Now recall that Consumtion per worker + saving per worker = income per worker i.e. c* + s* = y*.

so At k = 81, s = 27- 6.75 = 20.25

And s* = saving rate * y = > 20.25 = saving rate * 27

Hence Saving rate = 0.75.

Hence, Golden Rule saving rate of the economy is 0.75 or 75%

Steady state occurs when saving per worker = depriciation rate*k

depriciation rate = saving per worker/k = 20.25/81 = 0.25

Hence, Depriciation Rate in the economy is 0.25 or 25%

At k = 134 steady state occurs when saving per person = depriciation rate * k = 0.25*134 = 33.5

hence consumption per worker = 39 - 33.5 = 5.5.

Hence Corresponding to k = 134 and y = 39 our consumption per worker c* = 5.5

Finally if k* = 41 which is lesser than golden rule level of capital directly implies that we can save more and increase level of k. Golden Rule occurs when MPK = depriciation rate, also remember that MPK is diminishing

. Hence for any k* < 81 MPK is greater than depriciation rate.

Hence, When k* = 41, Marginal Product of Capital(MPK) is Greater than Depriciation Rate.

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