# Question

Introduce government activity in the endogenous growth model as follows. In addition to working u units of time in producing goods, the representative consumer works v units of time for the government and produces gvH goods for government use in the current period, where g > 0. The consumer now spends 1 – u – v units of time each period accumulating human capital.

(a) Suppose that v increases with u decreasing by an equal amount. Determine the effects on the level and the rate of growth of consumption. Draw a diagram showing the initial path followed by the natural logarithm of consumption and the corresponding path after v increases.

(b) Suppose that v increases with u held constant. Determine the effects on the level and the rate of growth of consumption. Draw a diagram showing the initial path followed by the natural logarithm of consumption and the corresponding path after v increases.

(c) Explain your results and any differences between parts (a) and (b).

(a) Suppose that v increases with u decreasing by an equal amount. Determine the effects on the level and the rate of growth of consumption. Draw a diagram showing the initial path followed by the natural logarithm of consumption and the corresponding path after v increases.

(b) Suppose that v increases with u held constant. Determine the effects on the level and the rate of growth of consumption. Draw a diagram showing the initial path followed by the natural logarithm of consumption and the corresponding path after v increases.

(c) Explain your results and any differences between parts (a) and (b).

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