Real GDP in a Solow Growth economy is determined by Y = K^1/2(AL)^1/2. The rate of depreciation is 2 percent per year. The population grows at a rate of 1 percent per year. Labour augmenting technological progress improves at rate of 2 percent per year. The savings rate is 0.20.

a. Provide a labelled diagram to illustrate and quantify steady state capital per effective worker, GDP per effective worker and savings per effective worker as Bundle A.

b. At equilibrium "A" GDP grows at a rate of __________ percent per year.

c. The government introduces a tax-free saving account. The savings rate rises to 0.40. Update your diagram to illustrate and quantify steady state capital per effective worker, GDP per effective worker and savings per effective worker as Bundle B.

d. At equilibrium "B" GDP grows at a rate of __________ percent per year.