This is a 4 part questions covering the SOLOW GROWTH MODEL. [1 total] Suppose that output per worker is given by y=10k0.5, n=0.02 (i.e.2%), d=0.08 (i.e. 8%), and that the savings rate is 10%. SHOW WORK FOR ALL CALCULATIONS. a. [2 points] Draw a diagram that shows the golden rule level of capital-labor ratio and maximum consumption (hint: c should be on y-axis). Also draw in k_max (maximum k) on the same diagram. [do not calculate; just draw] b. [] Use the info given above to calculate the steady state levels of the following 4 variables: capital per worker, output per worker, consumption per worker, and savings per worker. c. [] Suppose that the economy is NOT yet at steady state, and that the economy is where the capital-labor ratio is equal to 36. How much is the economy investing in capital at this point? i.e. calculate the investment per worker that takes place when the capital-labor ratio is equal to 36 (and the economy is NOT at steady state). d. [7 points] Use the Solow Growth model to show (GRAPH) and to discuss the impact of a FALL in population growth rate (n). In your discussion, elaborate on the impact of the shock on the steady state level of k, y, and c. Provide intuitive economic reasoning that explains how the economy transitions from the old steady state to the new steady state. LABEL DIAGRAM! (diagram 3. & discussion 3.)
