Question

The technocrats, the econometricians and the engineers in Thriftland have determined that the country's production function is given by:

Y = 2000K^0.25L^0.75

The depreciation rate is 4 per cent of per capita capital stock (δ = 0.04) and the population of the country has been growing at a healthy six percent per annum. There is no technological growth. It is also known that Thriftland as a whole saves 30 percent of its income. The country is in a steady state: its entire savings are currently used for depreciation purposes only.

(a) Is this country saving "too much?" Explain.

(b) What is the current per capita consumption (i.e., consumption per worker) of this country?

(c) How can the government attempt to maximize per capita consumption of this country? What should be the “Golden Rule” target savings rate?

(d) If this target savings rate is achieved, what would be the value of per capita consumption in this country?

(e) At Golden Rule steady state, is GDP higher or lower than before?

(f) Draw a graph to explain (a) through (e).

Answer 1

Figure 1

40000 30000 Consumption initially Golden rule Consumption 2000 n+d)k 0.3y- 10000 0.25y 80000 100000 20000 40000 60000 120000 140000 Capital (k)

So - (n+ 6) * A the Slea a) state n+d 3 ว่า n t (35 ma +oo much -213 3 20oo 3 3 s213 mt Can ncrease pex capita censwnpHom b^ Aeereio Saw ngs .

Pee a cop*+a Cnsumph 3 25 38 Comsumphom 0.25 Thi Qovet can maximize consvmpti 2b 25650 (e) Tn* per capi1o tnam beore36 340