A. Consider an economy with a production function given by Y = . The depreciation rate is = 0.1, the population growth rate is n = 0.02 and the technological growth rate is g = 0.03. The economy’s current savings rate is s = 0.3 and the current level of capital per effective worker = 1. Answer the following questions.

- What is the consumption per effective worker in the current year () ?
- What is the capital per effective worker in the next period () ?
- What is the steady state level of output per effective worker (y*) ?
- Find the golden rule level of output per-effective worker () ?
- Compare the economy’s savings rate with the golden-rule savings rate. Is the economy saving less ?

B. Consider an economy in which the consumption, investment and production functions are as follows

C = 10 + 0.8(Y – T)

I = 40 – 2.5r

F(K,L) =

Suppose government spending is 20, taxes equal 25 and the supply of factors is = = 125. Answer the following questions.

- What is the equilibrium level of real GDP.?
- What is the equilibrium real interest rate?
- Find the level of national savings. How much of that savings is from the private agents?
- Find the level of investment in equilibrium.
- Suppose taxes increase to 35. What is its effect on private savings? (Give numerical answer)