A decrease in the investment rate. Suppose the U.S. Congress en-

acts legislation that discourages saving and investment, such as the elimination of the investment tax credit that occurred in 1990. As a result, suppose the investment rate falls permanently from $s'$ to $s''$.

Examine this policy change in the Solow model with technological progress, assuming that the economy begins in steady state. Sketch a graph of how (the natural log of) output per worker evolves over time with and without the policy change. Make a similar graph for the growth rate of output per worker. Does the policy change perma-

nently reduce the level or the growth rate of output per worker?