A decrease in the investment rate

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A decrease in the investment rate: Suppose a country enacts a tax policy that discourages investment, and the policy reduces the investment rate immediately and permanently from s to s'. Assuming the economy starts in its initial steady state, use the Solow model to explain what happens to the economy over time and in the long run. Draw a graph showing how output evolves over time (put Y_t on the vertical axis with a ratio scale and time on the horizontal axis), and explain what happens to economic growth over time.

Reference no: EM131000975

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