1. Suppose the production is given by 0.5K1/3(AN)2/3. Suppose the depreciation rate is 2%, number of workers grows at 2% per year and rate of technological progress is 3% per year.

a. If the saving rate is 14% then find the steady state values of capital per unit of effect worker and output per unit of effective worker.

b. Suppose the economy is at steady state with saving rate being equal to 14%. Now suppose the savings rate increases to 15% from 14%. What will be the capital per unit of effective worker one year after the change in savings rate?

Show your calculations for both (a) and (b).

2. Using the IS-LM diagram, show the impact of a contractionary monetary policy for a country that maintains:

(a) a target interest rate

(b) a target money supply

Also explain your diagrams.