Answer the following questions using the basic Solow growth model, without population growth or technological progress.

Answer the following questions using the basic Solow growth model, without population growth or

technological progress.

(a) Draw a diagram with per worker output, y, consumption, c, saving, s and investment, i, on the

vertical axis and capital per worker, k, on the horizontal condition. On this diagram, clearly

indicate steady-state values for c, i, and y. Brie

y outline the condition that holds in the steady-

state (i.e. what is the relationship between investment and the depreciation of capital?).

(b) Suppose that society becomes less thrifty, resulting in a lower rate of savings, s. Using the above

diagram, how does the new steady-state capital stock per worker, k, compare to the stock in part

(a)? How does output per worker compare? How does consumption per worker compare? [Note:

Even if output per worker decreases, consumption per worker need not decrease. Why not?]

(c) Suppose that the saving rate decreases at time t0. On a graph plot c, k, and i against t and show

how the economy adjusts between the original and the new steady-state. Brie

y explain why each

variable is changing in the way that you have drawn it in your diagram.

 
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