Consider an economy that is characterized by the Solow Model. The (aggregate) production function is given by:

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Y = 16.2K^{1/4}L^{3/4}

Note: Keep your answer to 4 decimal places if needed. Be sure to show your work.

In this economy, workers consume 80% of income and save the rest. The labour force is growing at 5% per year while the annual rate of capital depreciation is 7%.

Initially, the economy is endowed with 2250 units of capital and 200 workers.

- Is the economy in its steady state? Yes/no, explain. If the economy is not in its steady state, explain what happens to the capital-labour ratio and output per worker in the economy during very long-run transition. (10 points)

The economy is in its steady state as described above (the steady state you solved for in part a).

- Suppose both the stock of capital and the number of workers double. What happens to the capital-labour ratio and output per worker when the economy reaches its new steady state? Explain. (5 points)
- Suppose instead of the doubling of both capital and workers, the level of total factor productivity increases by 25%, what happens to the capital-labour ratio and output per worker when the economy reaches its new steady state? Explain your answer with the aid of ONE appropriate diagram. Be sure to explain what happens to the variables during transition to steady state. (10 points) Get Economics homework help today