Problem: After reviewing the latest gures of investment rates for China and US, the US Government is considering a scal policy manoeuver to increase investment rate in US. In this question you are asked to use the Solow model to evaluate the impact of this policy change. For simplicity assume that the US is a closed economy so that
Y = C + G + I
where Y is GDP, C is private consumption, G is government consumption and I is investment. Assume that the government currently taxes GDP at a 20% rate and all tax revenues go to nance government consumption expenditures, which are equal to 20% of GDP (so that G = 0:2Y ). The private sector consumes 80% of after-tax GDP ((1-0.2)Y).
a) Compute the current US investment rate (I/Y)