Solow Growth Model
1. Derive the expressions for steady-state capital K* and steady-state output Y*.
2. Suppose that the investment rate decreases by 20%. What is the impact of it on steady-state capital K* and steady-state output Y*? Show algebraically.
3. Illustrate the above scenario using the complete Solow diagram. Also draw the transition dynamics assuming that the investment rate decreased only in the year 2010.
4. What is the prediction of the Solow growth model about the determinants of capital-output ratio? Is it consistent with the data?
5. Suppose that due to a new invention of advanced microprocessor, TFP increases by 10%. What is its impact on K* and Y*? Show both algebraically and graphically.
6. In addition to advancement in TFP, suppose that capital depreciation rate increases. Illustrate the impact of these two simultaneous events using the complete Solow diagram.