sample questions of ISI ME 2 , 2010

Posted by vishruti on May 03, 2010; 4:33pm
URL: http://discussion-forum.276.s1.nabble.com/sample-questions-of-ISI-ME-2-2010-tp4990586p4998757.html

QUESTION 8

Consider a Solow model with the production function Y = K^1/2L^1/2, where Y ,
K and L are levels of output, capital and labour, respectively. Suppose, 20% of
income is saved and invested. Assume that the rate of growth of labour force is 0.05.

(a) Find the capital-labour ratio, rate of growth of output, rate of growth of
savings and the wage rate, in the steady state growth equilibrium.

(b) Suppose that the proportion of income saved goes up from 20% to 40%.
What will be the new steady state growth rate of output?

(c) Is the rate of growth of output in the new steady state equilibrium different
from that obtained just before attaining the new steady state (after
deviating from the old steady state)? Explain.