Assume that the size of the population, L, does not change over time, while the growth rate of “knowledge” is equal to ∆At At = u.
a) Find the steady state in this economy. What happens to the capital per capita, output per capita and consumption per capita in the steady state?
b) Suppose that s = 0.1, δ = 0.1, α = 0.3, L = 1 and u = 0.1. Furthermore, suppose that the economy is in the long-run equilibrium, but in period t = 0 the government implements a policy that changes u to 0.2. What happens to the output and consumption per capita in the short and the long run?
c) Would you advice the government to implement a policy which would change u to 1.0? Why or why not?