Consider a Solow growth model with Cobb-Douglas production, savings rate s, depreciation rate δ, population growth rate n, and rate of technological progress equal to g. You can use your answers from
(a) Consider the following empirical observations for the U.S.:
Capital stock is 2.5 times GDP Population growth is roughly 2%
Depreciation accounts for 10% of GDP GDP grows at a rate of 3%
Capital owners' share of output is roughly 30%
Based on these data, is the U.S. currently at the golden rule level of capital?
(b) Based on these data, what is the golden rule level of capital?
(c) Suppose the U.S. government implements a policy that achieves the savings rate needed to achieve the golden rule level of capital. Using impulse responses, illustrate how the following variables would change as the U.S. transitions to its new balanced growth path: capital, output, and consumption.