Question 2: (5 marks) Consider the following model based on Solow-Swan's model: AK+ = 1+ - 0.25K, (1) Capital Dynamics (2) Goods Market Equilibrium k = Su St = 0.4Y, (3) Savings Function Y = 2K 0.25 (4) Production Function Y = C++ St (5) Income Function In the above, Yt stands for output in period t, Kt stock of capital, It investment, St savings, and Ct consumption. There is no population growth and population is normalized to N=1. Based on the above information, answer the following questions. EXAMINATION CONTINUES ON NEXT PAGE Page 4 out of 7 Semester Two Final Examination, 2021 ECON 2020 Intermediate Macroeconomics, a) (2 marks) Consider the economy at steady state and derive the equilibrium steady state value of capital K'. b) (2 marks) Derive the equilibrium capital accumulation equation, and for an initial value of the capital stock Ko = 4 in period 0, derive the value of Ki and C1. Suppose a government sector is introduced in this Solow-Swan model, with: G = T T = 0.27 A fraction of 0.3G, is spent on public investment, which supplements the productive capital stock. c) (1 mark) Derive the equilibrium capital accumulation equation for this economy Question 2: (5 marks) Consider the following model based on Solow-Swan's model: AK+ = 1+ - 0.25K, (1) Capital Dynamics (2) Goods Market Equilibrium k = Su St = 0.4Y, (3) Savings Function Y = 2K 0.25 (4) Production Function Y = C++ St (5) Income Function In the above, Yt stands for output in period t, Kt stock of capital, It investment, St savings, and Ct consumption. There is no population growth and population is normalized to N=1. Based on the above information, answer the following questions. EXAMINATION CONTINUES ON NEXT PAGE Page 4 out of 7 Semester Two Final Examination, 2021 ECON 2020 Intermediate Macroeconomics, a) (2 marks) Consider the economy at steady state and derive the equilibrium steady state value of capital K'. b) (2 marks) Derive the equilibrium capital accumulation equation, and for an initial value of the capital stock Ko = 4 in period 0, derive the value of Ki and C1. Suppose a government sector is introduced in this Solow-Swan model, with: G = T T = 0.27 A fraction of 0.3G, is spent on public investment, which supplements the productive capital stock. c) (1 mark) Derive the equilibrium capital accumulation equation for this economy