A hypothetical economy is represented by the following parameters-
Labour force (L) = 40 million, Capital stock (K) = 700 million, saving rate (S) = 0.35, rate of depreciation (δ)
=0.05, rate of population growth (n) =0.015, partial (α) = 0.45 and total factor productivity (A) is constant.
Calculate effective output (y) and effective stock of actual capital (k) (3+3)
b) Find out steady-state stock of effective capital (k*) (3.5)
c) Show graphically the impact of a fall in the rate of depreciation using Solow’s diagram.
(a)
(b)
(c)
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