An economy has a Cobb-Douglas production function:
Y=Kα (LE) 1-α.
The economy has a capital share of a third, a saving rate of 24 percent, a depreciation rate of 3 percent, a rate of population growth of 2 percent, and a rate of labor-augmenting technological change of 1 percent. It is in steady state.
a. At what rates do total output, output per worker, and output per effective worker grow?
b. Solve for capital per effective worker, output per effective worker, and the marginal product of capital.
c. Does the economy have more or less capital than at the Golden Rule steady state? How do you know? To achieve the Golden Rule steady state, does the saving rate need to increase or decrease?
d. Suppose the change in the saving rate you described in part (c) occurs. During the transition to the Golden Rule steady state, will the growth rate of output per worker be higher or lower than the rate you derived in part (a)? After the economy reaches its new steady state, will the growth rate of output per worker be higher or lower than the rate you derived in part (a)? Explain your answers.