Problem 2 (40 points) Consider the solow model for an economy characterized by the following production function: F(K, L

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Problem 2 40 Points Consider The Solow Model For An Economy Characterized By The Following Production Function F K L 1 (54.77 KiB) Viewed 25 times

Problem 2 (40 points) Consider the solow model for an economy characterized by the following production function: F(K, L) - KL Depreciation rate for the capital stock is 0.1. 1. Express the production function in per worker terms. Find the steady state value of capital corresponding to s-0.6. Compute the corresponding values for output and consumption in per worker terms) (10 points) 2. Is it the optimal steady state for the economy? If not, find the optimal steady state using the golden rule. Represent it graphically. (10 points) 3. Suppose that the economy starts in point i, but then policymakers adjust s in order to converge towards the golden rule values. Comment on the situation of the economy and why policymakers are making this adjustment. Why the economy was out of the golden rule levels? How will be the consumption path towards the new steady state? Which values will characterize the economy after 1 time period? If every time period is one year, will the economy reach the golden rule steady state in more or less than 15 years? Explain your reasoning. (20 points) (Hint: Recall that Ak=ke+1 - kt. Consider the steady state in point 1 and change s according to the golden rule. Compute the change in per worker capital stock applying the law of motion of capital and the golden rule s to the steady state k of point 1).