Let's see if a massive gift of foreign aid can the destiny of a Baby Solow economy. Consider this economy: Y = K^1/2 , s=10%, = 5%, K0 = 0.5

The country starts off with a tiny capital stock of 0.5. First, answer this question:

(a) With these values, what are the steady-state levels of capital and GDP? In other words, what is this nation's economic destiny? Due to a gift from Elon Musk, this country's capital stock rises to 100. Musk is trying to "kick start" this economy with lots of aid, as you can tell. So we're starting off with 100 units of capital (much higher than the steady state level of capital, as you'll see). Starting off with such a capital-rich country offers us a simulated economy where we can evaluate the theory that foreign aid-whether in the form of the Marshall Plan, World Bank grants and subsidized loans, or "foreign orders for military equipment"can make a nation permanently richer that it would be without the aid. Now, answer this question:

(b) Report Kt , Yt , for t=0, 1, 2, 3, and separately report K* and Y*, the steady-state values of both.

(c) What are the growth rates of K and Y for these years? (Start with year 1, so report 3 years).

(d) Why isn't the foreign aid working in this simulated economy the way many commentators would predict? Is it reasonable to argue that it's due mostly to "corruption?"

(e) If starting K can't change a nation's destiny in Baby Solow, can a change in the savings rate? If this country permanently tripled its savings rate (i.e., its investment rate) to 30%, what would be the effect on steady-state Y? Would this policy come close to closing the gap in GDP per capita across countries?

(f) Why doesn't tripling the savings rate have a big multiplier effect in Baby Solow?