Question

1. Let's review the setup of the Solow growth model with saving rate s, constant population growth rate n, and constant technology growth rate g Kt+1(1-8)K Lt+ 1 = (1 + n) Et+1-(1+g)E a) b) c) What is the steady-state capital and output per effective worker? (5pts) Solve for the golden rule level of capital. What is the saving rate then? (5pts) Many health experts have argued that malnutrition leads to reduced work capacity. Suppose in the Solow model, this is reflected in the fact that people become more productive the more they eat, in particular assume that where the technology growth rate g is defined as g(1 - s)1- s, where s is the saving rate. Assume that the labor still grows at constant rate n. The basic tradeoff is now between higher current consumption and higher future per effective worker consumption. Solve for the optimal saving rate that maximizes long-run per effective worker output. Solve for the optimal saving rate that maximizes long-run per effective worker consumption. (5pts) d) Now assume that the total national saving. St, is The extra term.-hKt, reflects the idea that when wealth (as measured by the capital stock) is higher, saving is lower. (Wealthier people have less need to save for the future.) Assume that n0 and g0. Find the steady-state values of per-worker capital, output, and consumption. What is the effect on the steady state of an increase in h? (5pts)

Answer 1