Untitled ECON204 MACROECONOMIC ANALYSIS SESSION 2, 2018 WEEK 9 TUTORIAL GUIDE Homework assessment - Identify one economic factor that affected the trend growth of GDP (e.g. natural disaster or change...

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Untitled ECON204 MACROECONOMIC ANALYSIS SESSION 2, 2018 WEEK 9 TUTORIAL GUIDE Homework assessment - Identify one economic factor that affected the trend growth of GDP (e.g. natural disaster or change in technology) in your country (selected for the group assignment) in recent years. Think about the effects of the economic factor using the Solow Swan model presented in the lecture. Question 1 Computing long run equilibrium and the golden rule Suppose that the production function is given by: ?? = 100 ??0.5??0.5 and the evolution of capital stock given by: ??+1 = (1 − ?)?? + ?? and in equilibrium ?? = ?? = ??? a. Derive the steady state levels of capital per worker k* = (Kt/Nt)* in terms of the saving rate (s) and the depreciation rate ( ). Explain why and how s and affect k*. b. Derive the equation for steady-state output per worker (y*) and steady-state consumption per worker (c*) in terms of s and . Explain why and how s and affect y* and c*. c. Suppose that = 5% (=0.05) and s = 5% (=0.05). Calculate k*, y* and c*. Calculate saving per worker (s*=S*/N=sY*/N=sy*)) d. Show these solutions for k*, y*, c* and s* on the Solow-Swan diagram. e. Using ? = 0.04, what is the saving rate that maximizes consumption per worker? What is the golden rule level of capital per worker, output per worker and consumption per worker? Why is this a useful concept? f. What would happen to your answers in part e. if N doubled? Explain why you get this answer. Question 2 For each of the following economic changes, assess the likely impact on the growth rate and the level of output per worker over the short-run and over the long-run. a. An increase in foreign direct investment. b. Stepping into aging society that induces people to save more and spend less.