3.4. Consider the economy described in Section 3.3, and assume + < 1 and n...

3.4. Consider the economy described in Section 3.3, and assume β + θ < 1 and n > 0. Suppose the economy is initially on its balanced growth path, and that there is a permanent increase in s.

(a) How, if at all, does the change affect the g˙A = 0 and g˙K = 0 lines? How, if at all, does it affect the location of the economy in (gA ,gK ) space at the time of the change?

(b) What are the dynamics of gA and gK after the increase in s ? Sketch the path of log output per worker.

(c) Intuitively, how does the effect of the increase in s compare with its effect in the Solow model?