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  3. let y10 sqrtk sqrtl suppose households save 10...

Question: let y10 sqrtk sqrtl suppose households save 10...

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Let Y=10 * sqrt(K) * sqrt(L)

Suppose households save 10% of all output. This savings is added to the capital stock for the next period.  On the other hand, depreciation destroys 3% of capital in each period.

  1. Draw a graph depicting the steady state equilibrium.  (You should have per capita capital on the x axis and per capita investment on the y axis.)
  2. Solve for the equilibrium, giving values for y*, k*, i*, and c*.
  3. Suppose the savings rate were to increase to 15%.
  1. Show the effect of this change on a graph like that you drew for part a.

ii.    Draw a graph showing income across time.  Start the graph a little before the change in savings, assuming the economy was in the steady state in part a.  Then show how incomes change over time after the one-time change in the savings rate.

  1. Go back to the original problem.  Now suppose the shift to computer technology means that the depreciation rate increases to 5%.  Repeat parts i and ii of part c.
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