Question

Problem 2 (Exogenous Growth Models [50 pts]) Consider the following numerical example using the Solow growth model. Suppose that F(K, N) = zK0.5N 0.5 and d = 0.05, s = 0.2, n = 0.025, N0 = 100 and z = 0.1. Suppose K = 400 in period 0 and the unit period is one year.

1. Determine the aggregate quantities K, C and Y of the capital stock, consumption and output for years 1, 2 ,3, 4 and 5. Summarize your results using a table [10 pts]. 2. Find k ? the steady state per-capita capital stock, consumption per capita and output per capita [10 pts].

3. Assume the government wants to implement a policy that will increase the long run per capita output by 25%. Determine the change in the savings rate s that will help achieve this goal [10 pts].

4. Now assume the government wants to implement a policy that will increase the long run consumption per capita by 25% instead. Determine the change the savings rate s that will help achieve this new goal [20 pts].

Answer 1