Q. A developed country has a saving rate of 28 percent and a population growth rate of 1 percent per year. Share in output is constant and that United States has been in a steady state.

A. What must saving rate be in initial steady state? [Hint: Use steady-state relationship, sy = ( + n + g)k.]

B. What is marginal product of capital in initial steady state?

C. Suppose that public policy rises saving rate so that economy reaches Golden Rule level of capital. What will marginal product of capital be at Golden Rule steady state? Compare marginal product at Golden Rule steady state to marginal product in initial steady state. Explain.

D. What will capital output ratio be at Golden Rule steady state? (Hint: For Cobb Douglas production function, capital output ratio is related to marginal product of capital.) E.