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Steady-state interest rates

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Now we will solve for the steady state in a calibration of the US economy in 2000. In
this problem, you will assume that the rate of growth of the work force is n = 0.017 and
there is no exogenous technological progress. The aggregate production function for the
US economy in 2000 is Y = (11.5)K 1/3 L 2/3 . The units are billions of 1996 dollars. A
plausible value for the depreciation of the capital stock is δ= 0.036, and a good value for
the national savings rate is σ= 0.16.

6. Use the formula r =f'(k) to calculate the steady-state rentals rate. Explain why
the real interest rate is r-n-δ. (Hint: if you give up a unit of consumption,
you can buy a unit of capital. That capital will yield f'(k) units of output next
year, but a fraction δ is used up in production and another fraction n is needed
for new workers.)

7. Is the US economy saving at the golden rule? What is the golden rule savings rate
for our economy?

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Solution Summary

Steady-state interest rates are assessed.