Answer to Question #65144 in Macroeconomics for Zoz

Question

Assume that the rate of growth of population equals 0. Suppose that there is a sudden increase in the rate at which capital depreciates. The production function remains unchanged.
1. On a graph, illustrate the effects of this change on the steady-state level of capital per worker if the saving rate remains unchanged.
2. Describe the effect of this change on the Golden Rule level of capital per worker, and explain your answer.

Answer 1

Suppose that there is a sudden increase in the rate at which capital depreciates.
1) In such case the stock of capital decreases due to subtractions caused by depreciation.
2) The Golden Rule level of capital accumulation is the steady state with the highest level of consumption. The idea behind the Golden Rule is that if the government could move the economy to a new steady state, where would they move? The answer is that they would choose the steady state at which consumption is maximized. To alter the steady state, the government must change the savings rate.
Reference:
https://www2.econ.iastate.edu/classes/econ302/alexander/Spring2006/SOLOW/SOLOWGROWTHMODEL.htm