Question

An economy (country A) has a Cobb-Douglas production function: Y = K^0.4 (LE) ^0.6

The economy has a saving rate of 48 percent, a depreciation rate of 2 percent, a rate of population growth of 1 percent, and a rate of labor-augmenting technological change of 3 percent.

Assume there is a second economy (country B) with everything identical to country A except for the rate of population growth, which is 2 percent.

Assume both countries start a k = 0, which country grows more in • (2 points) the short run (before steady state is reached), as given by the rate of growth of output per worker? • (2 points) the long run (once steady state is reached) in per-worker terms, as given by the rate of growth of output per worker? • (2 points) the long run (once steady state is reached) in aggregate terms, as given by the rate of growth of aggregate output?

Answer 1