# Question: Introduce government activity in the endogenous growth model as follows

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).

## Answer to relevant Questions

Reinterpret the endogenous growth model in this chapter as follows. Suppose that there are two groups of people in a country, the low-skilled workers and the high-skilled workers. The low-skilled workers have less human ...A consumer’s income in the current period is y = 100, and income in the future period is y' = 120. He or she pays lump-sum taxes t = 20 in the current period and toe = 10 in the future period. The real interest rate is ...Assume a consumer who has current-period income y = 200, future-period income y' = 150, current and future taxes t = 40 and toe = 50, respectively, and faces a market real interest rate of r = 0.05, or 5% per period. The ...Suppose a credit market with a good borrowers and 1-a bad borrowers. The good borrowers are all identical, and always repay their loans. Bad borrowers never repay their loans. Banks issue deposits that pay a real interest ...Suppose that we modify the model of the firm's investment behavior by assuming that any capital the firm has remaining at the end of the period can be sold at the price p'K (in our model we assumed the capital could be sold ...Post your question