Use the instructions in the appendix to set up the Solow model in Excel with the Investment Share γ equal to 0.3 and with the Depreciation Rate δ equal to 0.02. Both numbers are just what we used in the chapter. Now increase the Investment Share to 0.36.
What is the new level of steady-state capital? (Remember, the level of steady-state capital is where Investment = Depreciation.)
At the new steady level of capital, what is the level of output Y?
Now change the Investment Share back to 0.3 and this time increase the Depreciation Rate to 0.025.
What is the new level of steady-state capital?
At the steady-state level of capital, what is the level of output Y?
Fill in the blanks with your conclusions:
An increase in the investment share ____________ the steady-state level of capital and output.
An increase in the depreciation rate __________ the steady-state level of capital and output.
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