Q1. Solow Growth Model. Consider the production function for a closed economy.=1/3()2/3Assume that the savings rate s equals 54% and the depreciation rate equals 1%. Further, assumethegrowthrateofthelaborforce is 3%andthegrowthrateoftechnologicalprogress is 2% per year.a. Find the steady-state values of (i) capital per effective worker, (ii) output per effective worker, (iii) the growth rate of output per effective worker, (iv) the growth rate of output per worker, and (v) the growth rate of output. (5 marks)

NowwemodifythebasicSolowgrowthmodelbyincludinggovernmentspendingasfollows. The government collects taxes T to finance its government spending G in every period. Government spending per effective worker is given by a constant g, where g= G/AN. WorkersconsumeafractionofdisposableincomeC=(1-s)(Y-T).Supposethatthegovernment has a balanced budget.

b. Write down the capital per effective worker accumulation equation. With the help of a diagram, illustrate how steady state is determined. Carefully label your diagram. (4 marks)

c. What is the effect of an increase in gon k*? What is the effect ofanincreaseing on aggregate consumption C? Explain. (2 marks)

Nowwemodifythewaywedefinegovernmentspending.Supposethatgovernmentspending GisproportionaltoaggregateoutputY,whereG=zY.Thatis,governmentspending is a fraction z of aggregate output Y.

d. With the help of a diagram, illustrate how steady state is determined. Carefully label your diagram.Whataretheeffectsofanincreaseinzoncapitalpereffectiveworkerk*and aggregate consumption C? Explain. (2 marks)