Suppose that government spending makes private Örms more productive; for example, government spending on roads and bridges lowers the transportation costs. This means that there are now two effects of government spending, the Örst being the usual effect of G we discussed in class and the second being similar to an increase in the nationís capital stock K.

(a) Show that an increase in G that is productive in this fashion could increase the welfare of the representative consumer.

(b) Show that the equilibrium effects on consumption and hours worked of and increase in G of this type are ambiguous but that output increases.