Assume we have a Cobb-Douglas production function of Y = K0.5L0.5. Assume s =0.25, d = 0.25, and initial k = 5. Derive the steady-state level of capital (k*) (calculate until Dk is at a level where the first 2 decimal points are 0.
A. What happened to capital accumulation? Did the capital stock increase or decrease.
B. Did the economy (y) increase or decrease? Why do you think that happened?