Question 3 (10 Points).

Suppose two countries A and B have the same structure, except that country A has a larger savings rate ( > ). Both countries' stocks of capital per capita are currently the same and smaller than their steady-state levels. That is, denoting current stock of capital per capita by and steady-state stock of capital per capita by , the current scenario has =

Question 4 (15 points): Use the social planner diagram to show the effects of an increase in TFP on consumption and labor supply . Describe the effects. What happens with output ?

Question 5 (10 points): Assume there is a government whose spending is unproductive and financed by a lump-sum tax . Use the social planner diagram to show the effects of an increase in government spending on consumption and labor supply . Describe the effects. What happens with output ? Explain.

Page of 3 O Question 3 (10 points): Suppose two countries A and B have the same structure, except that country A has a larger savings rate (s4 > SB). Both countries' stocks of capital per capita are currently the same and smaller than their steady-state levels. That is, denoting current stock of capital per capita by k and steady-state stock of capital per capita by kss, the current scenario has KA = kB