Suppose we are at steady state in the Solow Model. Suddenly we have a significant technological advance.
Show, using properly labeled graph(s), how this improvement in technology affects the steady state levels of income per worker, consumption per worker, and the capital-labor ratio.
Does steady state income per worker increase, decrease, or stay the same?
Does steady state consumption per worker increase, decrease, or stay the same?
Does the steady state capital-labor ratio increase, decrease, or stay the same?
Do any of your answers depend on what you assume about the golden rule capital-labor ratio? Why or why not?
Now suppose the country has been in a war and half of the nation’s capital stock has been destroyed. Describe the affect on consumption per work in the long run (i.e., steady-state).