Consider a Solow economy that begins with a capital stock equal to $300 billion, and suppose its steady-state level of capital is $500 billion. To its pleasant surprise, the economy receives a generous gift of foreign aid in the form of $100 billion worth of capital (electric power plants, machine tools, etc.) By what proportion does consumption per person increase in the long run? 4 (Q7) Per capita GDP in the long run Suppose an economy begins in steady state. By what proportion does per capita GDP change in the long run in response to each of the following changes? Hint: Start with equation (5.9). Y* y = L* = A/2 1/2 (9) " Pay particular attention to how number 3 is different from 1 and 2. 1. The investment rate doubles. (5.9) y* A/2 (25) 1/2 y* Yo /2 (4) 1/2 = 21/2 .. (1 + g) y = y* g -1 = 2-1 41.42% 2. The depreciation rate falls by 10%. 3. The productivity level rises by 10%. 4. An earthquake destroys 75% of the capital stock. 5. A more generous immigration policy leads the population to double.