An economy can be described by a Solow growth model with the productionfunctionY

Question

An economy can be described by a Solow growth model with the productionfunctionY=(K^(alpha.))((EL)^(1-alpha.)). Graph what will happen to the steady-state level of capital per effective worker and steady-state growth rate of income per worker in the following scenarios: a. Steady-state level of capital per effective worker increases. Steady-state growth rate of income per worker stays the same (g). b. Steady-state level of capital per effective worker decreases. Steady-state growth rate of income per worker increases to the new g. c. Steady-state level of capital per effective worker stays the same. Steady- state growth rate of income per worker stays the same (g).

Explanation / Answer

Answer...

Steady state growth rate of output per worker is given by g. Since here, g=0. Hence, growth = 0

b. Steady state growth rate of total output is given by n+g. Since here, g+n=0.02+0=2%. Hence, growth = 2%

c. Steady state level of consumption per worker is given by (1-s)y = (1-0.2)20000 = 16000

d.Steady state level  of investment per worker is given by sy. Since here, sy=0.2*20000 = 4000

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