Following the report you have prepared for the Treasury, one of the comments you received is...
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Following the report you have prepared for the Treasury, one of the comments you received is that you are not allowing technology to grow over time, so you have decided to prepare a new report allowing for that possibility. You can assume that the growth rate of technology is g > 0, and continue making the same assumptions on population growth you made before. When these assumptions are made, the capital accumulation equation (in 'per effective worker' terms) assumes the following format: Akt = syt - (n+g+8)kt, where s is the savings rate and 8 is the capital depreciation rate. k = Kt/(A+L+) and yt = Y/(A+Lt). In your report you need to answer the following questions: 1. Find the steady-state level of income per effective worker assuming the production function follows the standard Cobb-Douglas production function. Show your work, step-by-step. 2. In 2020, Australia had a GDP per capita level of around $48,747 while Algeria's was about $10,844. Using the result you found in (1), give two reasons that could explain why this difference exists. 3. Ceteris paribus, what happens to the level of income per capita at the steady state when n increases. Explain why (intuitively) using 1-2 sentences. 4. Find the expression of consumption per capita at the steady state in this economy. Compare this case to the case when the population does not grow (but A still grows). 5. Assume A= 10, n = 0.08, 8=2%, g= 0.06, and a = 0.2 for this exercise. Use Microsoft Excel (or equivalent) to plot a graph illustrating the relationship between consumption per worker at the steady state and the savings rate. Hint: use 0.01 increments of the savings rate when plotting your graph. 6. What is the value of the Golden Rule of Savings rate in this economy? You need to do some research to answer this question. Calculate the exact value. Show your work. Following the report you have prepared for the Treasury, one of the comments you received is that you are not allowing technology to grow over time, so you have decided to prepare a new report allowing for that possibility. You can assume that the growth rate of technology is g > 0, and continue making the same assumptions on population growth you made before. When these assumptions are made, the capital accumulation equation (in 'per effective worker' terms) assumes the following format: Akt = syt - (n+g+8)kt, where s is the savings rate and 8 is the capital depreciation rate. k = Kt/(A+L+) and yt = Y/(A+Lt). In your report you need to answer the following questions: 1. Find the steady-state level of income per effective worker assuming the production function follows the standard Cobb-Douglas production function. Show your work, step-by-step. 2. In 2020, Australia had a GDP per capita level of around $48,747 while Algeria's was about $10,844. Using the result you found in (1), give two reasons that could explain why this difference exists. 3. Ceteris paribus, what happens to the level of income per capita at the steady state when n increases. Explain why (intuitively) using 1-2 sentences. 4. Find the expression of consumption per capita at the steady state in this economy. Compare this case to the case when the population does not grow (but A still grows). 5. Assume A= 10, n = 0.08, 8=2%, g= 0.06, and a = 0.2 for this exercise. Use Microsoft Excel (or equivalent) to plot a graph illustrating the relationship between consumption per worker at the steady state and the savings rate. Hint: use 0.01 increments of the savings rate when plotting your graph. 6. What is the value of the Golden Rule of Savings rate in this economy? You need to do some research to answer this question. Calculate the exact value. Show your work.
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