Assume in the Solow growth model that s=.25, n=.02, d=.08, and f(k)=k^3.
A) Assume that z=2. What is the steady state level of capital per worker and consumption per worker?
B) Now, Assume that initially z=2 and the economy is in the steady state you measured in part (a). Then assume that z falls to 1.8 permanently. What is the new steady state? Explain capital per worker and output per worker in every of the first 10 period after z falls, and Discuss this in a figure.
C) Now, assume alternatively that z=2 initially the economy is in the steady state, and then z falls to 1.8, but now for only 10 periods. Then, z=2 forever. Explain the path followed by capital per worker and output per worker in the first 10 periods after z falls. Again, show this in a figure.
D) What conclusions can you draw from your results in part (a) through (c)? Discuss.