Q2

K
1) Since at the steady state, the value of capital per effective worker k = , output
AN
Y
per effective worker y= . Given that the aggregate production function
AN
Y
Y =K ( AN ) , we can sub Y =K ( AN ) into y=
α 1−α α 1−α
:
AN
K α ( AN )1−α
( )
α
Y K
y= = = =k α
AN AN AN
In steady-state, capital per effect worker is:

( )
1
s
k ¿= 1−α
δ + g A + gN
1
Sub α = , δ=4 % , s=18 % , gA=2% , gN =1.5 % into k ¿
3
1

( )
1
¿ 0.18 1−
k= 3 =3.7181
0.04+0.02+0.015
1
Sub α = , δ=4 % , s=18 % , gA=2% , gN =1.5 % into y ¿, we can get the output per
3
effective worker at the steady state.
1
3

( ) ( )
α 1
¿ α s 0.18 1−
y =( k ¿¿ ¿) = 1−α
= 3 =1.5492¿
δ + gA+ gN 0.04+0.02+0.015

In steady state, consumption per worker:

¿ ¿
c =( 1−s ) y =( 1−0.18 ) ×1.5492=1.2703

The golden rule is a rate of saving that maximizes the steady state consumption per
worker, which denoted by sG .
1
3
1

( ) ( )
α 1
α s s 1−
y ¿ =( k ¿ ) = 1−α
= 3 =( 13.333 · s ) 2
g A + gN +δ 0.02+0.015+0.04
1
¿ ¿ 2
c =( 1−s ) y =( 13.333· s ) · ( 1−s )
¿ −1 1
dc
=1.8255 s 2 −5.4765 s 2 =0
ds
1
Therefore, the golden saving rate sG = .
3
The growth rates of output per worker and consumption per worker is gy=gc=gA=2 %
along the balanced growth path.

2) (i)
In new steady state, capital per effective worker is:
1

( )
1
0.24
¿ 1−
k = 1
3 =5.7243
0.04 +0.02+0.015
And the new output per effective worker is:
 1 1
y 1 =( k 1 ) =( 5.7243 ) =1.7889
¿ ¿ 3 3

The consumption per effective worker under the new steady state is:
c 1¿ =( 1−s ) y 1¿=( 1−0.24 ) ×1.7889=1.3596
Increasing in saving rate would lead to a new steady state, which brings higher capital
per effective worker, output per effective worker and consumption per effective worker.
Since in steady state, output and capital grow at same rate as effective worker, which is
g K =g Y =g A + g N , thus long run growth rate of output per effective worker is g y =g A=2%
.
Therefore, the long-run growth rate of consumption per effective worker would have
the same growth rate as output per effective worker which is g A =2 %.
The long-run growth rates of output per worker and consumption per worker would not
change since the growth rate is independent of saving rate s, saving rate only has an
effect on the output per worker in long run.
(ii)
Based on the capital accumulation formula, we can derive that capital per effective
worker:
1

( )
α
s k t −( δ+ g A + g N ) 0.24 · k t 3 −0.075 k t
k t+1 = + kt= + kt
1+ g A + gN 1.035

Thus, the output per effective worker is:

1
y t +1=( k t +1 ) 3

And consumption per worker is equal to:

c t +1=( 1−s ) y t +1
Since the economy is initially in steady state. At t=0, the saving rate increases to s=0.24, thus
the consumption per effective worker at t=0 is:
c 0= (1−0.24 ) y 0=0.76 ·1.549=1.177
Capital per worker is equal to capital per effective worker times the level of productivity
K C
which is =k·A ; and consumption per worker: =c·A . The level of productivity A
N N
g
increases with a rate of A =2 % A
; At t=0, 0 . =1
 chart (a)
6.000

5.000

4.000

3.000

2.000

1.000

0.000
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99
k y c

3.000

Chart (b)
2.500

2.000

1.500

1.000

0.500

0.000
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99

ln(Y/N) ln(C/N)

In the short run, the change in saving rate would increase output per effective worker to
5.7243 and capital per effective worker to 1.7889. However, it results in a decrease in
consumption per effective worker, which drops from 1.2703 to 1.177 at t=0.
Correspondingly, output per worker would be increased and consumption per worker
would be decreased.
But over time, output per effective worker, capital per effective worker, and
consumption per effective worker are increased and reach their new steady state.
Output per worker and consumption per worker is also increased but grow at a rate that
greater than g A =2 % before it hits the new steady state. When it reaches the new
steady state, all variables will have the growth rates of g A =2 % along the balanced
growth path.