Question 3: Papua New Guinea (PNG) and COVID19 (13 marks) The PNG government is also considering its options to reignite economic growth in the country post-COVID19. Rather than investing in R&D (like Australia-Question 1), PNG decides to focus on investing in capital. a) Argue why it makes sense for a developing country like PNG rather than for a developed country like Australia, to opt for capital investment? (4 marks) The PNG government intends to double its capital per worker from its current 2021 steady state levels. To do so, the governments will increase the investment rate (as a share of GDP). b) Show in Figure 4 the minimum increase in the investment rate that is required to achieve its 2025 investment ambition. (4 marks) Figure 4: The Solow model and PNG Output per worker (v) production function depreciation investment Capital per worker (#) K2021 K2025 If the PNG government decides to increase its investment share as you suggested under b), capital per worker levels will grow gradually to the new steady state which we assume will be reached in 2025. c) Draw in Figure 5 the trajectory of growth in capital per worker in PNG between 2021 and 2025. Is it a straight line, or not? And if not, what shape does the trajectory have? (5 marks) Figure 5: Growth trajectory capital per worker PNG Capital per worker K2025 K2021 time 2021 2025