1. Solow Growth Model. Suppose that the U.S. economy can be described by the Sol

Question

1. Solow Growth Model. Suppose that the U.S. economy can be described by the Solow Growth Model and that it was at its steady state in 2008. In 2009, President Obama proposed a huge, sustained increase in government spending to be financed by borrowing rather than by higher taxes. Based only on this additional information, clearly and accurately show the effects of this increased spending on the economy’s capital-to-labor ratio and income-per-worker.

I'm stuck at the contrary of the question and assumptions of the solow growth model (the model ignores government spending and international trade). How can you analyse the government spending in this situation when the model assumes there s no government spending.

Explanation / Answer

An increase in government spending financed by borrowing would lead to increased interest rates. This would change the savings rate s and capital per worker k. With this information you should be able to see the effects of the government spending

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