Exercise 11: Comparative statics in Solow's Model
Explain how the following events affect output, capital and consumption per unit of labor in the long run and
along the transition according to Solow's Model:
a) The destruction of 30% of the capital stock because of a natural disaster.
b) A permanent increase in the immigration rate.
c) A permanent increase in the labor market participation rate.
d) A permanent increase in the depreciation rate.
e) A temporal increase in the savings rate.
f) A permanent increase in the savings rate.


Exercise 13: Growth and capital over-accumulation
Suppose two countries, A and B, with the same production function Y = Kα L
1-α . The value of α is 0.30, the
growth rate of population is 2% and the depreciation rate is 5%.
a) Show that with price-taking firms the share of labor must be 1-α .
b) Compute the stock of capital, output and consumption per unit of labor in the steady state if the savings
rates were 25% for country A and 35% for country B.
c) Compare both economies to the Golden Rule