Question

3. Transition Dynamics Consider the Solow growth model with constant population and no techno- logical progress as studied in class. Suppose the economy is initially in the steady state, with the level of per-capita capital stock of kss. The per-capita production function is given by y -f (k) - Akt, 0 < α < 1. In each of the following scenarios, plot the transition time path of per capita capital stock. kt, per-capita output, yt, and per-capita consumption, ct- (1-s )%. (a) A natural disaster breaks out, wiping out half of the capital stock. (b) The software update to fix the recent Intel-processors security breach causes a "one-time" per- manent decrease in the factor productivity, A.

Answer 1

economies for which there are steady-states with constant, non-zero growth rates determined by some decisions made by economic agents, like the level of education, or by some policy choices, like a given tax rate. These are known as endogenous growth models and will be studied in later chapters. Per capita income, the ...