Consider an economy in which the amount of investment is equal to the amount of saving (i.e., the economy is closed to i

Business, Finance, Economics, Accounting, Operations Management, Computer Science, Electrical Engineering, Mechanical Engineering, Civil Engineering, Chemical Engineering, Algebra, Precalculus, Statistics and Probabilty, Advanced Math, Physics, Chemistry, Biology, Nursing, Psychology, Certifications, Tests, Prep, and more.
Post Reply
answerhappygod
Site Admin
Posts: 899603
Joined: Mon Aug 02, 2021 8:13 am

Consider an economy in which the amount of investment is equal to the amount of saving (i.e., the economy is closed to i

Post by answerhappygod »

Consider an economy in which the amount of investment is equal
to the amount of saving
(i.e., the economy is closed to international flows of
capital).
Any output that is not saved is consumed (all equivalently, C=Y-S;
C=Y-I; c=y-s; c=y-i).
The production function is ๐‘ฆ๐‘ฆ = ๐ด๐ด๐‘˜๐‘˜๐›ผ๐›ผ and labor force grows at
rate n while productivity (A) is
constant.
The โ€œgolden rule level of saving โ€“ investment โ€ is the โ€œoptimalโ€
saving โ€“ investment rate
(๐›พ๐›พ๐บ๐บ) that maximises consumption per worker (๐›พ๐›พ is the fraction of
income that is invested โ€“
saved).
Prove that marginal product of capital (MPK) equals (๐›ฟ๐›ฟ + ๐‘›๐‘›) at
the golden rule level of saving
โ€“ investment (๐›ฟ๐›ฟ is depreciation rate).
Show the golden rule level of saving โ€“ investment on a graph.
On the same graph, show the case in which this economy is over
saving โ€“ investing. (Hint: In
this case, higher saving - investment does increase GDP per worker,
but not consumption
per worker.)
Join a community of subject matter experts. Register for FREE to view solutions, replies, and use search function. Request answer by replying!
Post Reply