Question

We know that a country reaches a steady state when investment equals depreciation. This means Consider an economy with the production function Squaring both sides and solving for K yields y2 Substituting K into the steady state equation gives Y2 A2 Solve this equation for Y. Divide both sides by Y and put everything on the other side to solve for Y. Once you do this, use this cquation to answer the question about the cconomy in the steady state What will make a country richer in the long run? Both changes will have the same impact on the steady state GDP. O doubling the saving rate O Neither will make the country richer in the long run. doubling total factor productivity

Answer 1

Select the last option (Doubling TFP)

For the steady state, we have gamma^y = delta Y^2/A^2 gamma = delta Y/A^2 Y = A^2 gamma/delta Hence, income depends directly on saving rate and TFP and is inversely related with depreciation rate Doubling the TFP will make the country richer because the saving rate alone will be insufficient to carry out the growth in income for long run Select doubling the TFP (Last option)