Consider a closed economy. The aggregate production function is given by The law of motion of...

 

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Consider a closed economy. The aggregate production function is given by The law of motion of capital reads 1-a Y₁-AKL AK+1-SY₁-6K₁. 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) Consider a closed economy. The aggregate production function is given by The law of motion of capital reads 1-a Y₁-AKL AK+1-SY₁-6K₁. 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)

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Step 12 Note Let N in letter b be the population growth rate Step 22 Please see attach... View the full answer