Suppose that the production function takes the form Y = AKa*L1-a, where a?= 1/3.

Question

Suppose that the production function takes the form Y = AKa*L1-a, where a?= 1/3. Assume that the saving rate, s = 0.15 and the rate of depreciation d = 0.05 Further, let A = 1, and L = 2, initially.
a) Suppose that A doubles. What happens to the steady state real interest rate? What happens to steady state wage rate?
b)Suppose that the steady state stock of capital is 20. What saving rate guarantees that the economy will converge to this level of capital? (You need to provide a numerical answer)

Explanation / Answer

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