For this question, consider the basic version of Solow's growth model taught in class (without population growth and technological progress) and the IS-LM 3 model. Remember that the most basic version of Solow's growth model does not contain government spending (G) or taxes (T).

(a) As a response to a negative investment shock following a recession, the U.S. federal government increased its current spending (G). The extra resources spent by the government is used to support the people who lost their jobs in the recession. Through the lens of the IS-LM model, what is the impact of this excess spending by the government in the short run. Use both the loanable funds market and money market graphs to explain.

(b) Incorporate G and T into the Solow growth model and write the four equations characterizing the model in per-worker terms. Construct the steady state diagram for the model with G and T. How will the steady state change if the government increases spending forever?

(c) Does your answer in part (b) contradict part (a)? If so, how can you reconcile the two theories?