Consider the recipient's perspective in the global impact of development versus relief aid. Suppose a fixed amount of aid b is given to each worker in a developing country and that donors commit to continue these aid flows indefinitely.

Compare:

Plan 1: b is added to investment

Plan 2: b is added to consumption

Use the Solow growth model to evaluate these plans in terms of their impact on LR steady-state consumption.

Assume aid flows do not change people's behavior except as specified in the Solow Growth Model, the domestic savings rate is significantly below the Golden Rule, and there is no technological progress.

Use a well-labeled graph to answer this question.

Indicate the steady-state levels of k, y, and c under both plans (k1, y1, c1 and k2, y2, c2). If the relative sizes on the graph are not accurate, clarify which is actually bigger (i.e., c1 or c2).

HINT: think about shifting sf(k) up by a constant amount b.