1. To face the impact of the pandemic the government has been forced to raise the deficit to very high level. Use the Solow growth model of Chapter 9 and what you learned in chapter 3 to graphically illustrate the impact of a permanent government deficit increase on the steady-state capital–labor ratio and the steady-state level of output per worker. Explain in words why the curves move the way they did. Be sure to label the: a) axes; b) curves; c) initial steady-state levels; d) terminal steady-state levels; and e) the direction curves shift.
2. Explain why a higher savings rate generates both positive and negative impacts on steady-state consumption per worker in the Solow growth model with population growth and technological change.