2. Suppose you have a production function Yt=F(Kt,Lt)=AK and the resource constraint Yt=Ct+It+Gt and the capital accumulation equation Kt+1=It+(1d)Kt Consumers consume a certain fraction of the output so the consumption equation is Ct=(1s)Yt The government spending Gt is a fraction of capital stock, so with the higher capital stock, there is more government spending. Gt=gKt Assume there is no population growth, so Lt=Lt+1=L (a) Derive a Solow-Growth model and describe the intuition of the equation. (b) What is the key assumption in this model (c) Find the steady state per-worker quantities of capital, output, and consumption (d) Draw the Solow model (the x-axis is Capital stock, the y-axis is output) (e) Suppose there was a big government spending. Therefore, gincreased. What is the new steady state per-worker quantities of capital, output, and consumption? 2. Suppose you have a production function Yt=F(Kt,Lt)=AK and the resource constraint Yt=Ct+It+Gt and the capital accumulation equation Kt+1=It+(1d)Kt Consumers consume a certain fraction of the output so the consumption equation is Ct=(1s)Yt The government spending Gt is a fraction of capital stock, so with the higher capital stock, there is more government spending. Gt=gKt Assume there is no population growth, so Lt=Lt+1=L (a) Derive a Solow-Growth model and describe the intuition of the equation. (b) What is the key assumption in this model (c) Find the steady state per-worker quantities of capital, output, and consumption (d) Draw the Solow model (the x-axis is Capital stock, the y-axis is output) (e) Suppose there was a big government spending. Therefore, gincreased. What is the new steady state per-worker quantities of capital, output, and consumption