In the Solow model with technological progress, consider an economy that begins in steady state with a rate of technological progress, g, of 2%. Suppose that g rises permanently to 3%. Assume α = 1/3.

a) What is the growth rate of output per worker before the change, and what happens to this growth rate in the long run?

b) Using the equation for growth accounting with a production function such as Y= BKα L1-α , do the growth accounting exercise for this economy, both before the change and after the economy has reached its new balanced growth path. (Hint: recall that B= A1-α). How much of the increase in the growth rate of output per worker is due to a change in the growth rate of capital per worker, and how much is due to a change in multifactor productivity growth?

c) In what sense does the growth accounting result in part b) produce a misleading picture of this experiment?