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consider an economy that follows the dynamic as in the...

Question: consider an economy that follows the dynamic as in the...

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Consider an economy that follows the dynamic as in the Solow model developed in class, with constant L. Suppose a country enacts a tax policy that discourages investment, and the policy reduces the investment rate immediately and permanently from s to s1. Assuming the economy starts in its initial steady state, use the Solow model to explain what happens to the economy over time and in the long run. Draw a graph showing how output evolves over time (put Yt orn the vertical axis and time in the horizontal axis). Do the same for capital and consumption.

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