Question

A country in a steady state invests 50% of its output in new capital (γ = 0.5) and depreciates 5% of its capital stock (δ = .05). With a capital stock of 100 units, labor remains constant. Because of technological innovation, production improves from Y = to Y = 2. What is the new steady-state level of output?

Answer 1

In a steady-state economy, the new steady-state level of output can be calculated using the formula Y = (I + K)/(1- ). With an investment rate of 50% and a depreciation rate of 5% on a capital stock of 100 units, the new steady-state level of output is 200 units.

Step-by-step explanation:

In a steady state economy, where the country invests 50% of its output in new capital and depreciates 5% of its capital stock, the new steady-state level of output can be calculated by using the formula:

Y = (I + K)/(1- )

Where:

• Y is the steady-state level of output
• I is the investment rate (50% of output)
• is the depreciation rate (5% of capital stock)
• K is the capital stock (100 units)
• is the investment-output ratio (0.5)
  

Plugging in the values:

Y = (0.5 * 100)/(1- 0.5) = 100/0.5 = 200 units

Therefore, the new steady-state level of output is 200 units.