# onsider the country Spendthriftia, with a depreciation rate d = 0.1, TFP A = 1, labor force L = 100 and saving rate s = 0. The country has the…

onsider the country Spendthriftia, with a depreciation rate ¯ d = 0.1, TFP A = 1, labor force L = 100 and saving rate s = 0.1. The country has the following production function: Yt = ¯AK1/3 t L2/3 t . (a) Find the steady state level of capital in the economy K∗, output Y ∗ and consumption C∗ (b) One morning the citizens decide that they need to save more for the future and increase their saving rate to s = 0.25. Find the new values for K∗, Y ∗ and C∗ (c) Starting from the ﬁrst steady state, calculate capital, output and growth rates for the next 25 periods. (Hint: You might ﬁnd it easier to use a spreadsheet program and the table we constructed in class.) What can you say about the growth rate? How many years does it take for output to close half the gap between the initial and the ﬁnal steady state?

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