The Solow AK model with transitional dynamics.

Consider the following Solow economy. Production is determined by: Y=F(K, L, A) = AK + K L 1 Population grows at rate n, capital depreciates at rate . Consumers save a fraction s of their income. Moreover, assume, and that efficiency A is constant. sA>d+ n

(i) Set up the dynamic equation for capital per worker. Will the economy converge to a balanced growth path?

What will be the growth rate of per capita variables in the (very) long run? What are the salient characteristics

of the production function that determine this result?

Question 5) Consider again the the previous model.

Will the growth rate of capital and income per worker

decrease in time as the economy becomes richer? Hence, if you have two economies that are the same in the

macro fundamentalsnamely the production function, s, , and A--which will grow faster, the initially richer

or the initially poorer economy? Does that mean that the initially poorer economy will have the same level of

income per capita in the very long run? Why?