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Question 1

By March 10, 2022No Comments

Question 1Consider the following economy.The production function is F(K,L)=K0.4(AL)0.6.The saving rate and the depreciation rate are respectively:s=0.20 and 6 =0.05.There is no population growth.The growth rate oftechnological progress is 2%,i.e.g 0.02.(i)Derive the capital accumulation equation for this economy.(30 marks)(i)Find the steady state value of the capital stock per effectiveworker.(20 marks)(i)Assume that the economy is at the steady state.Now supposethat the saving rate increases to:s=0.30.Calculate the effect onthe steady state of the economy and discuss the process ofconvergence to the new steady state using a diagram.(20 marks)(iv)Discuss the following statement:‘An increase in the saving rateinduces an increase in the rate of economic growth in the long-run only if the production function is linear in the accumulatingfactor (i.e.capital).'(30 marks)

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