Suppose that you have a standard Solow model with a Cobb - Douglas produc - tion function and both labor augmenting productivity growth and population growth . The central equation of the model is Kim = ( 1 + 2 ) ( 1 + 1 ) SARS + ( 1 - 5) FEX ] 130 ( a ) Suppose that the economy initially sits in a steady state . Suppose that at time I there is a surprise increase in a that is expected to last forever Use the main diagram to show how this will impact the steady state capital stock per efficiency unit of labor ( b ) Plot out a diagram showing how the capital stock per efficiency unit of labor ought to react dynamically to the surprise increase in a ( ) Plot out diagrams showing how consumption and output per efficiency unit of labor will react in a dynamic sense to the surprise increase in ( 1 ) Do you think agents in the model are better off or worse off with a higher of How does your answer square with what happens to the steady state values of capital output , and consumption per efficiency unit of labor ? How can you reconcile these findings with one another