Reference no: EM132405680

Before 1985, the German economy was at its steady state. The government was running a budget surplus while the economy had a current account deficit. Between 1985 and 1995, the government still ran a budget surplus but the current account moved into surplus. Between 1996 and 2005, the government budget fell into deficit while the current account remained in surplus. In all three periods the (absolute value) magnitude of the budget surplus and the current account deficit were approximately the same. Use a single Solow Growth Model diagram to clearly show the steady state levels of income-per-effective-worker and the capital-per-effective-worker ratio associated with:

a. The period before 1985.

b. The period between 1985 and 1995.

c. The period between 1996 and 2005.

Also, provide a brief economic explanation for any differences between these 3 periods and explain the adjustment mechanism that moved the economy from one steady state to another.