Question 2

Suppose the economy of Poorland is described by the simple Solow model without technological progress or population growth. The economy starts at the steady state. Suppose another country concludes that income per worker is too low in Poorland and therefore sends them at one-time development aid package (in form of capital) at period to.

a. Show what happens as a result of this aid package in a graph showing the production function, investment function and depreciation function (all in per-worker terms).

b. Show a time path of output per worker that shows the old steady state, the change due to the aid package and the transition to the long-run equilibrium over time. Briefly explain your graph.

c. If Poorland would like to maintain the capital stock per worker that it had right after the aid package was received, what would it need to do?