Suppose you have a production function Yt =F(Kt,Lt)=A KtL1 (1) and the resource constraint Yt = Ct + It + Gt (2) and the capital accumulation equation Kt+1 = It + (1 d )Kt (3) Consumers consume a certain fraction of the output so the consumption equation is Ct = (1 s )Yt (4) The government spending Gt is a fraction of capital stock, so with the higher capital stock, there is more government spending. Gt = g Kt (5) Assume there is no population growth, so Lt = Lt+1 = L

(a) Derive a Solow-Growth model and describe the intuition of the equation.

(b) What is the key assumption in this model

(c) Find the steady state per-worker quantities of capital, output, and consump- tion

(d) Draw the Solow model (the x-axis is Capital stock, the y-axis is output)

(e) Suppose there was a big government spending. Therefore, g increased. What is the new steady state per-worker quantities of capital, output, and consump- tion?