Problem
Consider the Solow growth model as described in the preceding exercise and include government spending. The government purchases G = Lg units of consumption good in the current period with g a positive constant. The government finances its public purchases with a lump-sum tax on consumers, where T = G denotes the balanced budget total taxes. Suppose that consumers spend a fraction 1 - s of their disposable income where 0
a. Show in a diagram how the capital-labor ratio is determined and what its value is in a steady state.
b. How many steady states are possible?
c. Concentrate on the steady state with the highest capital-labor ratio. What is the impact of an increase in public spending per worker g on the capital-labor ratio and output per worker in the steady state? What are the effects on aggregate output, consumption, and investment? What is the effect on the growth rate? Explain briefly.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.