Problem1 : Consider the economy analyzed in section 3.3 of your text (i.e. the model with capital). Assume that theta + beta < 1 and n > 0, and that the economy is on its balanced growth path. Describe how each of the following changes affects the steady state lines for g_A and g_K and the position of the economy in (g_A, g_K) space at the time of the change:

a) An increase in n

b) An increase in a_K

c) An increase in theta 

Problem 2: Problem 2: Consider the model in section 3.3 of your text (i.e. the model with capital) with beta + theta > 1 and n > 0.

a) Draw the phase diagram for this case.

b) Show that regardless of the economy’s initial conditions, eventually the growth rates of A and K (and hence the growth rate of Y) are increasing continually.