Suppose that a fictional modern economy whose production process is well described by a labor-augmenting Cobb-Douglas production function is in steady-state and has a population growth rate of 5% and a rate of technological progress of 2% Capital income is 10% of GDP, and the depreciation rate of capital stock is 100% The capital to total output ratio is 8.5 

a. Calculate the current steady-state marginal product of capital for this economy using the information provided (10 points) 

b. Calculate the economy's "Golden Rule" level of marginal product of capital.

c. Use the MPKs you calculated in parts a and b to determine whether this economy is currently above, at, or below the Golden Rule level of capital stock per efficient unit of labor Please graphically illustrate your answer and explain your reasoning.

(HINT: Use the diminishing returns property of the Cobb Douglas production function to help you determine which steady-state is further along with the horizontal) 

d. Given the position of the steady-state relative to the Golden Rule level, what do the economy's policy makers need to do to get the economy to the Golden Rale level? Please give at least ONE concrete policy recommendation.

Answer rating: 100% (QA)

a The income of capital is 10 of the GDP implies that the capital share of GDP is 10 or 01 Therefore ... View the full answer