An economy is described by the standard Solow model without technological progress and without population growth. You are given the information that the savings rate dropped to a lower level in this economy, but you don’t know by how much it did so. Suppose that prior to the drop in s the economy was in a steady-state with a capital stock per worker higher than the Golden Rule level.

a. In a graph which should include the production function, the investment function and the depreciation function (all in per-worker terms) show how the economy is affected by this drop in the savings rate. Make sure to label each axis, all curves and steady states clearly!

b. Sketch the relationship between the savings rate and the steady-state consumption per worker. Show in this graph the effect of the drop in the savings rate. Remember that the information given at the beginning of the question still holds!

c. Provide an analysis about how consumption per worker, capital per worker and output per worker behave over time. That is, draw time paths that show the behavior of each of these variables immediately before and then after the drop in the savings rate.

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a The economy is affected by the drop in the savings rate through the investment function which shif... View the full answer