Consider the Solow growth model as described in the preceding exercise and include government spending. The government purchases G = Lg units of consumption good in the current period with g a positive constant. The government finances its public purchases with a lump-sum tax on consumers, where T = G denotes the balanced budget total taxes. Suppose that consumers spend a fraction 1 - s of their disposable income where 0

a. Show in a diagram how the capital-labor ratio is determined and what its value is in a steady state.

b. How many steady states are possible?

c. Concentrate on the steady state with the highest capital-labor ratio. What is the impact of an increase in public spending per worker g on the capital-labor ratio and output per worker in the steady state? What are the effects on aggregate output, consumption, and investment? What is the effect on the growth rate? Explain briefly.