Consider a Solow economy that begins with capital stock equal to $200 billion, and suppose its

steady-state level of capital is $400 billion. Now suppose this economy receives a gift of foreign aid

in the form of $100 billion worth of capital.

(a) Use the Solow model to explain what happens to capital per worker, output per worker, and

consumption per worker, both immediately and over time in this economy.

(b) Suppose instead of starting below its steady state, the economy begins in steady state with

capital equal to $400 billion. Answer part (a) for this case.

(c) In this example, does foreign aid have a long-run effect on the welfare of poor countries?