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The technocrats, the econometricians and the engineers in Thriftland have determined that the country's production...

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Accounting

The technocrats, the econometricians and the engineers in Thriftland have determined that the country's production function is given by:

Y = 2000K0.25L0.75

The depreciation rate is 4 per cent of per capita capital stock ( = 0.04) and the population of the country has been growing at a healthy six percent per annum. There is no technological growth. It is also known that Thriftland as a whole saves 20 percent of its income. The country is in a steady state: its entire savings are currently used for depreciation purposes only.

(a) Is this country saving "too much?" Explain.

(b) What is the current per capita consumption (i.e., consumption per worker) of this country?

(c) How can the government attempt to maximize per capita consumption of this country? What should be the Golden Rule target savings rate?

(d) If this target savings rate is achieved, what would be the value of per capita consumption in this country?

(e) At Golden Rule steady state, is GDP higher or lower than before?

(f) Draw a graph to explain (a) through (e).

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