Consider an economy that follows the dynamic as in the Solow model developed in class. Suppose a country enacts an immigration policy thatincreasesthe labor force.We model this as a permanentincreasein the parameter toL

.

Suppose that the country begins in steady-state (t=0). Assume that the change in the parameter occurs in period 2 (t=2) and that this effect is permanent. Answer the following:

• a)(8 points)Analyze this change using a Solow diagram. What happens to the economy over time?Here, I want you to show theSaving and Depreciation curveon the Y-axis and Capital on the X-axis,before and after the shock. And explain what would happen.

• b)(4 points) In thelong-run,what happens toaggregate output?and tooutput per capita?

• c)(15 points) Draw a graph showing what happens toAggregate capital (K
• t
• ), output (Y
• t
• ) and consumption (C
• t
• ) over time.
• You should have three different plots:(i)K
• t
• vs t ,(ii)Y
• t
• vs t,(iii)C
• t
• vs t (all starting att=0).
• You should clearly show what happensat the periodof the shock, theperiod before and afterthe shock, and in the long run as we did in class.
• You should show ticks in the x-axis for t=0, t=1, ... , t=5.