question archive Let us introduce government spending in the basic Solow model
Let us introduce government spending in the basic Solow model
Subject:EconomicsPrice: Bought3
Let us introduce government spending in the basic Solow model. Consider the basic model without technological change and suppose that (2.9) takes the form Y(t) = C(t) + I(t) + G(t), with G(t) denoting government spending at time t. Imagine that government spending is given by G(t)=oY(t). (a) Discuss how the relationship between income and consumption should be changed. Is it reasonable to assume that C(t) = SY(t)? (b) Suppose that government spending partly comes out of private consumption, so that C(t) = (s – 20)Y(t), where a € [0, 1]. What is the effect of higher government spending (in the form of higher o) on the equilibrium of the Solow model? (C) Now suppose that a fraction o of G(t) is invested in the capital stock, so that total investment at time t is given by 1(t)= (1 – 5 – (1 – 1) 0 +00) Y(t). Show that if o is sufficiently high, the steady-state level of capital-labor ratio will increase φ as a result of higher government spending (corresponding to higher o). Is this reasonable? How would you alternatively introduce public investments in this model?
