A small country has an aggregate production function per hour of labor given by Y = K1/2. Its depreciation rate is 1 percent and its investment rate is 10 percent. What is its steady-state level of capital?
A) 10
B) 100
C) 1
D) You need to know the steady-state level of RGDP to answer this question.

Question

Quizplus · Accepted Answer

To find the steady-state level of capital, we need to set investment equal to depreciation. Investment is 10 percent of the current level of capital, while depreciation is 1 percent of the current level of capital. Thus, the steady-state level of capital will be where I = 0.01K, or 0.1K = 0.01K, which implies K = 100.

A Small Country Has an Aggregate Production Function Per Hour