Question: This question asks you to base your answer on the graphical presentation of the Solow model to determine the effect of a permanent reduction in

This question asks you to base your answer on the graphical presentation of the Solow model to determine the effect ofa permanent reduction in government deficiton the steady-state values of a number of per-worker variables.

a. Which curve shifts and what is the direction of the shift as a result of the permanent reduction

in government deficit? Explain.

b. What is the effect of the shift in part (a) on the steady-state level of capital per effective labor?

Explain.

c. What is the effect on steady-state growth rate of capital per effective labor? Explain.

d. What is the effect on the steady-state level of (raw) output? Explain.

e. What is the effect on steady-state growth rate of (raw) output? Explain.

f. What is the steady-state growth rate of capital/output ratio? Explain.

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