1. Use the following production function and investment, depreciation, labor, an

Question

1. Use the following production function and investment, depreciation, labor, and technology assumptions to solve for the Solow model steady state level of Capital (K*) and Output (Y* Labor L 1.0 Investment s 25% Depreciation d 7% -40% or .4 Technology A 1.0 2. Re-solve the above using a depreciation rate d of 5%. Does the result relative to your answer in #1 make sense? Why 3. Re-solve part 1 with an investment rates of 15%. 4. Re-solve part 1 with a technology factor A of 1.5 5. Based in part on your above answers and what you know about the Solow model, does the Solow model provide a basis for explaining long run economic growth in the United States over the past 130 years? Can the model explain short run growth?

Explanation / Answer

5.Yes. Solow model provides a basis for explanation long run based on the changes in the population growth, productivity of capital and labour and improvements in technological progress. The model explain short run growth by the virtue of changes in the savings rate and investment patterns, which vary in short run, in the economy which are prevalent in the economy.

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