1. Assume the economy is in equilibrium in the labor and capital factor markets. Suppose that a technological advance raises total factor productivity. Explain, step-by-step, how the economy adjusts to arrive at a new long-run equilibrium. In your explanation make sure that you address any changes in marginal product, factor prices and factor income share.

2. Why is it important, for an open economy, that investment not be consistently higher than saving? If this occurs how does it relate to national consumption, balance of trade and saving?

3. In theory, differences in output across economies and over time might be the result of differences in either capital input, labor input, or productivity. The evidence points clearly to productivity as a more likely and powerful source of growth differences. Which aspects of the Solow growth model help to explain why the inputs of capital and labor contribute little to growth of output, relative to productivity?