Question

a) Draw a general production function, investment function, and depreciation line.

b) Show the equilibrium K/N and Y/N. Now assume higher savings rate (S₀ to S₁). What happens? Show graphically and discuss verbally.

c) Why can growth not be sustained with ever increasing savings rates?

d) What does the depreciation line mean and how does it fit into your discussion?

Let:

$\frac{K_{t+1}}{N}-\frac{K_{t}}{N}=s\sqrt{\frac{K}{N}}-\delta \frac{K}{N}$

Let the savings rate = 15% and the depreciation rate = 10%

Answer 1

I output per worker 1 ak - s. f) Capital per worker Breakinen suvestment line or Deprecation nya flik) 1 Increase in saving wilt leads to rise in the : steady state. Hence, per capita variables, kiy, and i would also increast. y (c) Saving increases ete growth over the Short run only. There is no change in growth rate over the long run. 0-15 K x 2K = 0.1k = 1.5 = 2.25 17:15