Suppose that an economy can be modelled with the Solow growth model. The production technology is
Y (t) = K(t)®L(t)¯;
where Y is output, K is the stock of capital, and L is e®ective labor. Also, note that
® + ¯ = 1. E®ective labor is
L(t) = A(t)N(t)
with _A = gA and _N = nN.
a) Find the steady state value of k = K=L.
b) Find the growth rate of output and consumption. Do they di®er from the growth rate of per capita output and per capita consumption?
c) Show how growth accounting could be used to learn the value of g.
d) Analyze the effects of an unanticipated permanent reduction in g on the real wage rate and the real interest rate.