Question

14. One of the following is NOT a feature of the Solow Model a) long-term economic growth rate b) If an economy is far from its steady-state level, it grows faster, so the closer the economy is to the steady-state value the growth rate moves to zero c) capital accumulation cannot serve as the engine of long-run economic growth d) Eventually net investment - subtracting depreciation from investment is zero and the economy stabilizes at the steady state 15. Consider the Solow model and assume the economy is in steady state. An increase in the investment rate has the following implication: a) An increase in the steady-state capital b) Output grows fastest immediately after the change in the investment rate and then over time the growth rate of output falls and the economy converges smoothly to its new steady state. c) The depreciation curve does not change d) All the above 16. Consider the Solow model and assume the economy is in its steady state. An increase in the depreciation rate has the following implication in the model a) An increase in the steady-state capital b) After this event, depreciation exceeds new investment, so the capital stock continues to decline until the economy reaches the lower steady-state capital c) The investment curve changes d) a) and c)

Answer 1

14.

Ans: a

Explanation: There is no long run economic growth in Solow model due to diminishing returns to capital.

15.

Ans: d.

Explanation: The options themselves.

16.

Ans: b.

Explanation: Steady state capital should decline and investment curve won't change as only depreciation is changed.

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