Government Expenditures

1) Assume that the economy is converging to its long

term steady state along the saddle path.

At time t=0, it has a level of capital per effective worker given by k(0), which is half of the steady state level of capital, k*.

At t=0 it is learned that the government expenditure changes from 0 to a level G(1)>0,

and that the change will take place for T periods, and back to 0 thereafter.

Show the qualitative dynamics of consumption and capital. How is T affecting the dynamics?

TFP: Total Factor Productivity

2) Assume that the economy is converging to its long term steady state along the saddle path.

At time t=0, it has a level of capital per effective worker given by k(0), which is half of the steady state level of capital, k*.

At t=0 it is learned that total factor productivity drops temporarily from z to z' and that the change will take place for T periods, and back to z thereafter.

Show the qualitative dynamics of consumption and capital.