Solow Diagram and Transition Paths. Assume that initially an economy is saving at a rate that exceeds its golden rule saving rate and that the economy is in a steady state equilibrium. Suppose that the economy reduces its saving rate towards the golden rule saving rate.
(a) Construct a Solow diagram that shows the effects on the steady state values of capital, output, and investment per effective worker.
(b) Does steady state consumption rise or fall? How do you know?
(c) Construct a transition path diagram that shows the effect of the reduction in the saving rate on capital per effective worker. You may do this by hand or you may use a computer.
(d) Construct a transition path diagram that shows the effect of the reduction in the saving rate on output per effective worker. You may do this by hand or you may use a computer.
(e) Construct a transition path diagram that shows the effect of the reduction in the saving rate on consumption per effective worker. You may do this by hand or you may use a computer.