Consider the one-period closed-economy general equilibrium model where the government uses lump-sum tax to finance government spending. Usually, we assume that government spending G is wasteful. For this question, assume instead that G increases the capital stock. That is, assume the following production function,

Y = zF(K + G, N)

Other sectors remain the same as in the standard model (one-period closed economy model). The government's budget constraint is G = T. The consumer maximizes his utility subject to his budget constraint C = w(h ? l) + ? ? T. Production function F satisfies all four key assumptions we impose on the production function. As a result, the PPF is still a concave function.

(a) Let G1 = 0, G2 > 0. Does an increase of the government spending G1 ? G2 increase or decrease the marginal product of labor for a given labor input N? Answer "increase" or "decrease". Which assumption on the production function do you use to reach this conclusion? (CRS, monotonicity, diminishing MP, or complementarity?)

(b) On the following graph, draw the PPF when G = G1 = 0 and label it as PPF1. Clear label where the PPF intersects the horizontal and vertical axes. You may use Y* to denote Y* = zF(K, h).