Problem1 : Consider the economy analyzed in section 3.3 of your text (i.e. the model with capital). Assume that theta + beta < 1 and n > 0, and that the economy is on its balanced growth path. Describe how each of the following changes affects the steady state lines for gA and gK and the position of the economy in (gA, gK) space at the time of the change:
a) An increase in n
b) An increase in aK
c) An increase in theta
Problem 2: Problem 2: Consider the model in section 3.3 of your text (i.e. the model with capital) with beta + theta > 1 and n > 0.
a) Draw the phase diagram for this case.
b) Show that regardless of the economy’s initial conditions, eventually the growth rates of A and K (and hence the growth rate of Y) are increasing continually.