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y = f (y). (19.2)
1
The existence and convergence properties of
steady-states depend on the f 0 (yt ) & f 00 (yt ).
In phase diagram, steady state values are gi-
ven by points at which f (yt ) intersects 450
line (curve depicting yt+1 = yt ).
2
Solow Model Revisited
yt = kt , 0 < < 1
where kt is the capital stock at time t. The
capital stock evolves over time as follows:
St = syt .
Imposing the equilibrium condition St =
It , we derive a non-linear difference equation
in capital stock, which tells us about the im-
plications of Solow growth model:
3
kt+1 = (1 )kt + skt .
The difference equation has two steady states
s 1
1
k = 0, .
s 1
1
k = 0 is unstable and k = is stable.
4
Stable Limit Cycles