1. Suppose that the economy is initially in a steady state and that some of the nation's capital stock is destroyed because of a natural disaster or a war.

(a) Determine the long-run effects of this on the quantity of capital per worker and output per worker?

(b) In the short run, does aggregate output grow at a rate higher or lower than the growth rate of the labor force?

(c) After World War II, growth in real GDP in Germany and Japan was very high. How do your results in part(a) and (b) shed light on this historical experience?

2. Consider the Solow Growth Model with technology given by

Y = zF(K,N) = zK^(1/2)N^(1/2)

where savings rate, s0.2, and depreciation rate, ? = 0.1. Both population growth, n and technolog- ical growth are 0. (Note: lower case letters denote per capita variables unless otherwise noted e.g. y=Y/N).

(a) What are the steady state values of k, y, c and i ?

(b) What are the values of k and y if the economy operates at the "Golden Rule" level of capital accumulation?

(c) Imagine that you want to "drive" this country in the "Golden Rule" levels of k and y. What is the saving rate that you have to impose? What would be the level of c?

(d) Assuming that you impose the new saving rate. What would be the immediate and long run effects on c, k, and y? Draw the time path of these variables.