Answer to Question #82845 in Macroeconomics for Andreia

Question

Consider a single Solow economy that has reached its balanced growth path. Suppose that n++a=0.06 and that  =0.03. Suppose also that the production function is Cobb-Douglas with  equal to 1/3. Now suppose that the economy opens up to international capital flows and that capital flows into (out of) the economy if the international interest rate is lower (higher) than the interest rate in the economy. Suppose the international real interest rate is 0.04. Show that whether capital flows in or out of the economy depends on its savings rate.

Answer 1

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