Suppose a country enacts a tax policy that discourages investment. As a result, the value of the parameter ¯s now goes to a smaller value ¯s?
a) Assuming that the economy starts at its initial steady state, use the Solow model to explain what happens to the economy (after the change of ¯s) over time and in the long run.
b) Draw a graph showing how output evolves over time (put Yt on the vertical axis and time on the horizontal axis). What happens to economic growth over time?