Consider a closed economy The aggregate production function is given by The law of motion of capital reads 1 a Y AKL AK 1 SY 6K Labor supply is given exogenously by I Notation Y, output, K, capital stock, L, labor, A constant technology level, 0 3 1 investment rate, 0 6 1 depreciation rate 1 Derive the capital stock and output in the steady state 2 Assume that the economy is in the steady state In period t 0, the depreciation rate increases to a higher value o' 6 Use the Solow diagram to show how the economy evolves over time Explain briefly (20 points)

Question: Consider a closed economy. The aggregate production function is given by The law of motion of capital reads 1-a Y-AKL AK+1-SY-6K. Labor supply is

Consider a closed economy. The aggregate production function is given by The law of motion of capital reads 1-a Y-AKL AK+1-SY-6K. Labor supply is given exogenously by I. Notation: Y,: output, K,: capital stock, L,: labor, A: constant technology level, 0 < 3 < 1: investment rate, 0 < 6

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