Tax policy that discourages investment

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Suppose a country enacts a tax policy that discourages investment. As a result, the value of the parameter ¯s now goes to a smaller value ¯s ′ .

a) Assuming that the economy starts at its initial steady state, use the Solow model to explain what happens to the economy (after the change of ¯s) over time and in the long run.

b) Draw a graph showing how output evolves over time (put Yt on the vertical axis and time on the horizontal axis). What happens to economic growth over time?

Reference no: EM13892112

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