(A) Consider an economy operating with a capital stock K₀, where K₀ is below the economy's steady-state capital stock. According to the Solow model, will the capital stock in this economy grow, shrink, or stay constant in the next period? Explain and illustrate graphically.
(B) Now, imagine that the economy is at its steady-state capital stock, K_SS1. Suppose there is an increase in technology. How will this change manifest itself in the graph? Show the economy after this increase in technology. Where is the new steady-state level of capital and output?

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The Answer of (A) Consider an economy operating with a capital stock K₀, where K₀ is below the economy's steady-state capital stock. According to the Solow model, will the capital stock in this economy grow, shrink, or stay constant in the next period? Explain and illustrate graphically. (B) Now, imagine that the economy is at its steady-state capital stock, K_SS1. Suppose there is an increase in technology. How will this change manifest itself in the graph? Show the economy after this increase in technology. Where is the new steady-state level of capital and output?

(A) Consider an Economy Operating with a Capital Stock K0

(A) Consider an Economy Operating with a Capital Stock K₀