A closed economy has the following Cobb-Douglas production function: F(K,L)=K1/3 (EL)2/3 where the notation is as in class

Economics Nov 25, 2020

A closed economy has the following Cobb-Douglas production function: F(K,L)=K^1/3 (EL)^2/3

where the notation is as in class. The depreciation rate is 5% and the saving rate is 32%. The economy is in a steady state, where consumption C increases at a rate 3% and the real wage w increases at a rate 2%.

(a) Calculate the GROWTH RATES of the following variables:

(i) consumption per worker, C/L
(ii) output per machine, Y/K

(b) If output Y is 200 billion THIS year, find the number of machines K NEXT year.

(c) By how many percentage points should the government change the saving rate so that the economy may converge to the golden rule steady state (use a "+" for an increase and a "-" for a decrease)? How would the current generation feel about the change?

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