3) Solow Growth Model (35 pts) The World Bank has been supporting structural adjustment in Niger. On December 5, 2017, the World Bank Board of Executive Directors approved the \"Fostering Rural Growth Reform Development Policy Financing\" program, which includes a $60 million IDA credit and a $60 million IDA grant (Project ID: P163318).1 Among the World Bank's central concerns in Niger is a rapid expansion in govcrmnent spending, which includes health and education. Development Policy Financing programs are supposed to be approved only after the macroeconomic reforms sought by the World Bank are put in place. In the case of Niger, the reforms reduced the government decit by cutting government capital expenditures from 9.9% of GDP in 2015 to 4.5% of GDP in 2016 and also cutting current expenditures (salaries, wages, etc.) Plans outlined in the World Bank program include cutting current expenditures by a trther 2.3% of GDP by 2020, for a total decline from 15.5% in 2015 to 13.9% in 2020. The decit reduction these cuts cause will increase private investment as less saving is diverted to nancing the government decit.2 In a Solow Growth Model, this is equivalent to increasing the savings rate. Suppose the World Bank program successfully reduces government expenditures via cuts in education and social programs. The long run impact of these spending cuts is slower labor productivity growth but, due to decit reduction, also a higher savings rate. Use the version of the Solow Growth Model that includes \"effective units of labor\" to analyze the long run impact on output per worker. Contrast two scenarios: high savings rate but low labor productivity growth (the World Bank-sponsored structural adjustment) versus low savings rate but high labor productivity growth (no structural adjustment). Analyze the equilibria in terms of effective workers on one graph (both cases together) and then the equilibrium paths of output per actual worker over time on another graph (again both cases together). Explain what those equilibrium paths show. See class notes and the Solow Growth Model handout for an example. can Show Transcribed Text