2. Analyze the model. [a.} EareFully draw the Solow diagram [i.e. the graph that we used to analyze the model}. Explain how an economy that starts with a lg! initial capital Eh will evolve over time. Make sure you indicate on the graph {and explain in words} what is happening in the economy over time. Also; remember to label axes and curves. [6 points} [b.} Explain if there is a long run equilibrium (steady state} to which the economy moves over time. Make sure to indicate where it is on the graph. Explain what hap- pens with capital stock over time and what happens once it reaches any such long 1 MI! 2 econ 3155' SEEIJ'JD * f2320 run equilibrium. Draw a path ot GDP per capita over time starting in year e. {4 points} (c. ) Suppose we have an economy that has been in its steady state for a while when suddenly, say because of climate change, extreme weather events become more fre- quent. As a result, the economy experiences an immediate, one-time, permanent increase in the rate of depreciation of capital. Use the Solow diagram to explain what will happen to the economy right after the shock and in the years thereafter. In a separate plot, show how GDP per capita will evolve over time. (6 points) (d. ) Explain whether and why (or why not) the impact of this shock on the economy is different in the short run (in the first few years after deprecation rate changes) than in the long run. (3 points) (e. ) Suppose we again have an economy have that has been in its steady state for a while when suddenly, say because of climate change, extreme weather events become more frequent. As a result, the economy experiences an immediate, one-time increase in the rate of depreciation of capital. The depreciation rate remains high for many years, however, eventually scientists are able to reverse the climate change pro- cess and things go back to normal (i.e. the deprecation rate falls back to its origi. nal level). Use the Solow diagram to explain what will happen to the economy right after the shock and in the years thereafter. In a separate plot, show how GDP per capita will evolve over time. (4 points)