4. Suppose an economy has capital share of half, a savings rate of 12%, depreciation rate of 2%, population growing at 2% and labor-augmenting technological change of 2% yearly.

a) What is the steady-state level of capital per efficiency unit of labor?

b) Is this economy at the golden rule level of savings/investment? Fully detail your reasoning.

c) If the economy decides to transition to Golden Rule, what will happen to consumption, capital per efficiency unit of labor and output per efficiency unit of labor in the short run and the long run?

d) Is it always better for an economy to have more rather than less output per efficiency unit of labor? Explain.

Answer rating: 100% (QA)

a To find the steadystate level of capital per efficiency unit of labor k we can use the formula from the Solow growth model k 2 Where 8 ng6 s savings ... View the full answer