Question 2 7 Government in the Solow model Question 2.7 in the Acemoglu book Let us introduce government spending in the basic Solow model. Consider the basic model Without technological change and suppose that Yt = 0,; + It + Gt. With 0,: denoting government spending at time t. Imagine that government spending is given by Gt = UK. a. Discuss how the relationship between income and consumption should be changed. Is it reasonable to assume that Ct 2 CE, Where c = 1 s from the lectures? b. Suppose that government spending partly comes out of private consumption7 so that Ct = (c AJ)Yt, Where A E [0.1]. What is the effect of higher government spending (in the form of higher a) 011 the equilibrium of the Solow model? c. NOW suppose that a fraction (25 of 0,; is invested in the capital stock7 so that total investment at time t is given by It 2 (1 c (1 A)J+