Suppose that the economy’s production function is : The saving rate (s) is 0.16, the rate of depreciation () is equal to 0.10, population growth (n)…

Suppose that the economy’s production function is : = √√ . The saving rate (s) is 0.16, the rate of depreciation (δ) is equal to 0.10, population growth (n) is equal to 0.02 and growth of technology (A) is equal to 0.04 per year. [15 marks]

A) Find the steady state values of i. The capital per effective worker ( ∗)

ii. Output per effective worker (∗) iii. The growth rate of output per effective worker iv. The growth rate of output per worker () v. The growth rate of output ()

B) Suppose that the rate of technological progress doubles to 0.08 per year. Re-calculate the answers to (A). Explain the differences.

(C) Now, suppose that the rate of technological progress is still equal to 0.04 per year as stated in part (A). Re-calculate the answers to (A). Are people better off in (A) or in (C)? Explain.

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