1 assume an economy has a production function ofy, Macroeconomics

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1 assume an economy has a production function ofy

1. Assume an economy has a production function of:

Y = AK^.35L^.65 with: A = 100, K = 1,000 and L = 400. There is no labor force growth and technology remains constant.

(a) Assume that the capital stock in this economy depreciates at 10%/year and the savings rate out of GDP is 40%. What would be the steady state level of y, c, s, k?

(b) Derive the golden rule savings rate for this economy. (Hint it will be 35 percent) What would be the new level of steady state y, c, s, k if the economy moved to the golden rule savings rate?

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Macroeconomics: 1 assume an economy has a production function ofy

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