Consider an economy characterized by the following production function: Y = AK1/3N2/3, with a capital stock of $3,000 billion and current net investment of $120 billion.
(a) If the growth rate of autonomous factors is zero and the growth rate of labor is 1 percent, what is the current growth rate of per person output? Is this a steady-state situation?
(b) If the government wanted to increase the growth rate of per person output by an extra percentage point through tax and subsidy policies that affected capital growth alone, by what percentage would it have to raise investment?
(c) In the unlikely event that the government successfully stimulated the required investment, at what rate of growth in output would the economy arrive in the steady state according to the implications of the Solow growth model? Does the text accept this assumption? Why or why not?