What are the effects on the growth rates of cumulative

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Reference no: EM1322973

Q. Modify the Solow growth model by including government expenditure as follows. The government purchases G units of consumption goods in the present period, where G = gN also g is a positive constant. The government finances its purchases through lump-sum taxes on consumers, where T denotes total taxes also the government budget is balanced every period, so which G = T. Consumers consume a constant fraction of disposable income which is: C = (1 - s)(Y - T), where s is the savings rate, with 0 < s < 1.

• Derive the equations which: i) Conclude the future stock of capital per worker (k') as a function of the present stock of capital per worker (k); ii) solve for the steady state capital stock per worker (k*); also Demonstrate in a diagram how the latter, k*, is Concluded.

• Demonstrate which there can be two steady states, one with high k* also one with low k*.

• Ignore the steady state with low k* also consider the one with high k*. Conclude the effects of an increase in g on capital per worker also on o/p per worker in the steady state. Illustrate what are the effects on the growth rates of cumulative o/p, cumulative consumption, and also cumulative investment?

• Explain your results.

Reference no: EM1322973

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