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Testbank Chapter 7: Economic Growth I

Description Question pool for Testbank Chapter 7: Economic Growth I


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The Solow growth model describes:
Answer

how output is determined at a point in time.


how output is determined with fixed amounts of capital and labor.
how saving, population growth, and technological change affect output over time.
the static allocation, production, and distribution of the economy's output.
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Unlike the long-run classical model in Chapter 3, the Solow growth model:
Answer

assumes that the factors of production and technology are the sources of the economy's
output.
describes changes in the economy over time.
is static.
assumes that the supply of goods determines how much output is produced.
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In the Solow growth model, the assumption of constant returns to scale means that:
Answer

all economies have the same amount of capital per worker.


the steady-state level of output is constant regardless of the number of workers.
the saving rate equals the constant rate of depreciation.
the number of workers in an economy does not affect the relationship between output per
worker and capital per worker.
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The production function y = f(k) means:
Answer

labor is not a factor of production.


output per worker is a function of labor productivity.
output per worker is a function of capital per worker.
the production function exhibits increasing returns to scale.

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When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the:
Answer

graph is a straight line.


slope of the line eventually gets flatter and flatter.
slope of the line eventually becomes negative.
slope of the line eventually becomes steeper and steeper.
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When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the slope of the line
denotes:
Answer

output per worker.


output per unit of capital.
the marginal product of labor.
the marginal product of capital.
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Two economies are identical except that the level of capital per worker is higher in Highland than in
Lowland. The production functions in both economies exhibit diminishing marginal product of capital.
An extra unit of capital per worker increases output per worker:
Answer

more in Highland.
more in Lowland.
by the same amount in Highland and Lowland.
in Highland, but not in Lowland.
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The consumption function in the Solow model assumes that society saves a:
Answer

constant proportion of income.


smaller proportion of income as it becomes richer.
larger proportion of income as it becomes richer.
larger proportion of income when the interest rate is higher.
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In the Solow growth model of Chapter 7, the demand for goods equals investment:
Answer

minus depreciation.
plus saving.
plus consumption.
plus depreciation.

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In the Solow growth model of Chapter 7, the saving rate determines the allocation of output between:
Answer

saving and investment.


output and capital.
consumption and output.
investment and consumption.
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In the Solow growth model of Chapter 7, where s is the saving rate, y is output per worker, and i is
investment per worker, consumption per worker (c) equals:
Answer

sy.
(1 s)y.
(1 + s)y.
(1 s)y i.
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In the Solow growth model of Chapter 7, investment equals:
Answer

output.
consumption.
the marginal product of capital.
saving.
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Question
In the Solow growth model of Chapter 7, for any given capital stock, the ______ determines how much
output the economy produces, and the ______ determines the allocation of output between
consumption and investment.
Answer

saving rate; production function


depreciation rate; population growth rate
production function; saving rate
population growth rate; saving rate
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______ cause(s) the capital stock to rise, while ______ cause(s) the capital stock to fall.
Answer

Inflation; deflation
Interest rates; the discount rate
Investment; depreciation
International trade; depressions

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Investment per worker (i) as a function of the saving ratio (s) and output per worker (f(k)) may be
expressed as:
Answer

s + f(k).
s f(k).
sf(k).
s/f(k).
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In this graph, when the capital-labor ratio is OA, AB represents:

Answer

investment per worker, and AC represents consumption per worker.


consumption per worker, and AC represents investment per worker.
investment per worker, and BC represents consumption per worker.
consumption per worker, and BC represents investment per worker.
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If capital lasts an average of 25 years, the depreciation rate is ______ percent per year.
Answer

25
5
4
2.5
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Question
In the Solow model, it is assumed that a(n) ______ fraction of capital wears out as the capital-labor
ratio increases.
Answer

smaller
larger
constant
increasing
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The change in capital stock per worker (k) may be expressed as a function of sthe saving ratio,
f(k)output per worker, kcapital per worker, and the depreciation rate, by the equation:
Answer

k = sf(k) k.
k = sf(k) k.
k = sf(k) + k.
k = sf(k) k.
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The steady-state level of capital occurs when the change in the capital stock (k) equals:
Answer

0.
the saving rate.
the depreciation rate.
the population growth rate.
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In the steady state, the capital stock does not change because investment equals:
Answer

output per worker.


the marginal product of capital.
depreciation.
consumption.
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In the Solow growth model of Chapter 7, the economy ends up with a steady-state level of capital:
Answer

only if it starts from a level of capital below the steady-state level.


only if it starts from a level of capital above the steady-state level.
only if it starts from a steady-state level of capital.
regardless of the starting level of capital.
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Question
In the Solow growth model, the steady-state occurs when:
Answer

capital per worker is constant.


the saving rate equals the depreciation rate.
output per worker equals consumption per worker.
consumption per worker is maximized.
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Exhibit: Capital-Labor Ratio and the Steady State

In this graph, capital-labor ratio k is not the steady-state capital-labor ratio because:
2

Answer

the saving rate is too high.


the investment ratio is too high.
gross investment is greater than depreciation.
depreciation is greater than gross investment.
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Exhibit: Steady-State Capital-Labor Ratio

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In this graph, the capital-labor ratio that represents the steady-state capital-labor ratio is:
Answer

k0.
k1.
k2.
k3.
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Exhibit: The Capital-Labor Ratio

In this graph, starting from capital-labor ratio k , the capital-labor ratio will:
1

Answer

decrease.
remain constant.
increase.
first decrease and then remain constant.
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In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output
will ______ until the steady state is attained.
Answer

increase; increase
increase; decrease
decrease; decrease
decrease; increase
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In the Solow growth model, if investment is less than depreciation, the capital stock will ______ and
output will ______ until the steady state is attained.
Answer

increase; increase
increase; decrease

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decrease; decrease
decrease; increase
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An economy in the steady state will have:
Answer

investment exceeding depreciation.


no depreciation.
saving equal to consumption.
no change in the capital stock.
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In the Solow growth model of an economy with no population growth and no technological progress,
the higher the steady capital-per-worker ratio, the higher the steady-state:
Answer

growth rate of total output.


level of total output.
growth rate of output per worker.
level of output per worker.
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The formula for the steady-state ratio of capital to labor (k*), with no population growth or technological
change, is s:
Answer

divided by the depreciation rate.


multiplied by the depreciation rate.
divided by the product of f(k*) and the depreciation rate.
multiplied by f(k*) divided by the depreciation rate.
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1/2

If the per-worker production function is given by y = k , the saving rate (s) is 0.2, and the depreciation
rate is 0.1, then the steady-state ratio of capital to labor is:
Answer

1.
2.
4.
9.
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1/2

If the per-worker production function is given by y = k , the saving ratio is 0.3, and the depreciation
rate is 0.1, then the steady-state ratio of capital to labor is:

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Answer

1.
2.
4.
9.
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1/2

If the per-worker production function is given by y = k , the saving ratio is 0.2, and the depreciation
rate is 0.1, then the steady-state ratio of output per worker (y) is:
Answer

1.
2.
3.
4.
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1/2

If the per-worker production function is given by y = k , the saving ratio is 0.3, and the depreciation
rate is 0.1, then the steady-state ratio of output per worker (y) is:
Answer

1.
2.
3.
4.
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If a war destroys a large portion of a country's capital stock but the saving rate is unchanged, the Solow
model predicts output will grow and that the new steady state will approach:
Answer

a higher output level than before.


the same output level as before.
a lower output level than before.
the Golden Rule output level.
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Among the four countriesthe United States, the United Kingdom, Germany, and Japanthe one that
experienced the most rapid growth rate of output per person between 1948 and 1972 was:
Answer

the United States.


the United Kingdom.
Germany.
Japan.
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Question
If the national saving rate increases, the:
Answer

economy will grow at a faster rate forever.


capital-labor ratio will increase forever.
economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is
reached.
capital-labor ratio will eventually decline.
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Starting from a steady-state situation, if the saving rate increases, the rate of growth of capital per
worker will:
Answer

increase and continue to increase unabated.


increase until the new steady state is reached.
decrease until the new steady state is reached.
decrease and continue to decrease unabated.
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The Solow model shows that a key determinant of the steady-state ratio of capital to labor is the:
Answer

level of output.
labor force.
saving rate.
capital elasticity in the production function.
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A higher saving rate leads to a:
Answer

higher rate of economic growth in both the short run and the long run.
higher rate of economic growth only in the long run.
higher rate of economic growth in the short run but a decline in the long run.
large capital stock and a high level of output in the long run.
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Assume two economies are identical in every way except that one has a higher saving rate. According
to the Solow growth model, in the steady state the country with the higher saving rate will have ______
level of total output and ______ rate of growth of output per worker as/than the country with the lower
saving rate.
Answer

the same; the same


the same; a higher
a higher; the same
a higher; a higher
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In the Solow growth model of an economy, with a given production function, depreciation rate, no
technological change, and no population growth, a higher saving rate produces a:
Answer

higher MPK in the new steady state.


higher steady-state growth rate of output per worker.
higher steady-state growth rate of total output.
higher steady-state level of output per worker.
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Examination of recent data for many countries shows that countries with high saving rates generally
have high levels of output per person because:
Answer

high saving rates mean permanently higher growth rates of output.


high saving rates lead to high levels of capital per worker.
countries with high levels of output per worker can afford to save a lot.
countries with large amounts of natural resources have both high output levels and high
saving rates.
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The Golden Rule level of capital accumulation is the steady state with the highest level of:
Answer

output per worker.


capital per worker.
savings per worker.
consumption per worker.
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The formula for steady-state consumption per worker (c*) as a function of output per worker and
investment per worker is:
Answer

c* = f(k*) k*.
c* = f(k*) + k*.
c* = f(k*) dk*.
c* = k* f(k)*.
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In the Solow growth model, increases in capital ______ output and ______ the amount of output used
to replace depreciating capital.
Answer

increase; increase
increase; decrease
decrease; increase
decrease; decrease

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Exhibit: Steady-State Consumption I

The Golden Rule level of the capital-labor ratio is:


Answer

k*A.
above k* but below k* .
A

k*B.
above k* .
B

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Exhibit: Steady-State Consumption II

Reference: Ref 7-1

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(Exhibit: Steady-State Consumption II) The Golden Rule level of steady-state consumption per worker
is:
Answer

AC.
AB.
BC.
DE.
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Exhibit: Steady-State Consumption II

Reference: Ref 7-1

(Exhibit: Steady-State Consumption II) The Golden Rule level of steady-state investment per worker is:
Answer

AC.
AB.
BC.
DE.
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In an economy with no population growth and no technological change, steady-state consumption is at
its greatest possible level when the marginal product of:
Answer

labor equals the marginal product of capital.


labor equals the depreciation rate.
capital equals the depreciation rate.
capital equals zero.
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Question
The Golden Rule level of the steady-state capital stock:
Answer

will be reached automatically if the saving rate remains constant over a long period of time.
will be reached automatically if each person saves enough to provide for his or her
retirement.
implies a choice of a particular saving rate.
should be avoided by an enlightened government.
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If an economy is in a steady state with no population growth or technological change and the marginal
product of capital is less than the depreciation rate:
Answer

the economy is following the Golden Rule.


steady-state consumption per worker would be higher in a steady state with a lower
saving rate.
steady-state consumption per worker would be higher in a steady state with a higher
saving rate.
the depreciation rate should be decreased to achieve the Golden Rule level of
consumption per worker.
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If an economy with no population growth or technological change has a steady-state MPK of 0.125, a
depreciation rate of 0.1, and a saving rate of 0.225, then the steady-state capital stock:
Answer

is greater than the Golden Rule level.


is less than the Golden Rule level.
equals the Golden Rule level.
could be either above or below the Golden Rule level.
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If an economy with no population growth or technological change has a steady-state MPK of 0.1, a
depreciation rate of 0.1, and a saving rate of 0.2, then the steady-state capital stock:
Answer

is greater than the Golden Rule level.


is less than the Golden Rule level.
equals the Golden Rule level.
could be either above or below the Golden Rule level.
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1/2

With a per-worker production function y = k , the steady-state capital stock per worker (k*) as a
function of the saving rate (s) is given by:
Answer

k* = (s/ )2.
k* = ( /s)2.
k* = s/ .

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k* = /s.
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To determine whether an economy is operating at its Golden Rule level of capital stock, a policymaker
must determine the steady-state saving rate that produces the:
Answer

largest MPK.
smallest depreciation rate.
largest consumption per worker.
largest output per worker.
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If an economy is in a steady state with no population growth or technological change and the capital
stock is above the Golden Rule level and the saving rate falls:
Answer

output, consumption, investment, and depreciation will all decrease.


output and investment will decrease, and consumption and depreciation will increase.
output and investment will decrease, and consumption and depreciation will increase and
then decrease but finally approach levels above their initial state.
output, investment, and depreciation will decrease, and consumption will increase and
then decrease but finally approach a level above its initial state.
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Suppose an economy is initially in a steady state with capital per worker exceeding the Golden Rule
level. If the saving rate falls to a rate consistent with the Golden Rule, then in the transition to the new
steady state, consumption per worker will:
Answer

always exceed the initial level.


first fall below then rise above the initial level.
first rise above then fall below the initial level.
always be lower than the initial level.
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A reduction in the saving rate starting from a steady state with more capital than the Golden Rule
causes investment to ______ in the transition to the new steady state.
Answer

increase
decrease
first increase, then decrease
first decrease, then increase
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When an economy begins above the Golden Rule, reaching the Golden Rule:
Answer

produces lower consumption at all times in the future.


produces higher consumption at all times in the future.
requires initially reducing consumption to increase consumption in the future.
requires initially increasing consumption to decrease consumption in the future.
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If an economy is in a steady state with a saving rate below the Golden Rule level, efforts to increase
the saving rate result in:
Answer

both higher per-capita output and higher per-capita depreciation, but the increase in
per-capita output would be greater.
both higher per-capita output and higher per-capita depreciation, but the increase in
per-capita depreciation would be greater.
higher per-capita output and lower per-capita depreciation.
lower per-capita output and higher per-capita depreciation.
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If an economy is in a steady state with no population growth or technological change and the capital
stock is below the Golden Rule level:
Answer

a policymaker should definitely take all possible steps to increase the saving rate.
if the saving rate is increased, output and consumption per capita will both rise, both in the
short and long runs.
if the saving rate is increased, output per capita will at first decline and then rise above its
initial level, and consumption per capita will rise both in the short and long runs.
if the saving rate is increased, output per capita will rise and consumption per capita will
first decline and then rise above its initial level.
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Suppose an economy is initially in a steady state with capital per worker below the Golden Rule level. If
the saving rate increases to a rate consistent with the Golden Rule, then in the transition to the new
steady state, consumption per worker will:
Answer

always exceed the initial level.


first fall below then rise above the initial level.
first rise above then fall below the initial level.
always be lower than the initial level.
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Question
When an economy begins below the Golden Rule, reaching the Golden Rule:
Answer

produces lower consumption at all times in the future.


produces higher consumption at all times in the future.
requires initially reducing consumption to increase consumption in the future.

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requires initially increasing consumption to decrease consumption in the future.


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An increase in the saving rate starting from a steady state with less capital than the Golden Rule
causes investment to ______ in the transition to the new steady state.
Answer

increase
decrease
first increase, then decrease
first decrease, then increase
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In an economy with population growth at rate n, the change in capital stock per worker is given by the
equation:
Answer

k = sf(k) + k.
k = sf(k) k.
k = sf(k) + ( + n)k.
k = sf(k) ( + n)k.
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The formula for the steady-state ratio of capital to labor (k*) with population growth at rate n but no
technological change, where s is the saving rate, is s:
Answer

divided by the sum of the depreciation rate plus n.


multiplied by the sum of the depreciation rate plus n.
divided by the product of f(k*) and the sum of the depreciation rate plus n.
multiplied by f(k*) divided by the sum of the depreciation rate plus n.
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In the Solow growth model of an economy with population growth but no technological change, the
break-even level of investment must do all of the following except:
Answer

offset the depreciation of existing capital.


provide capital for new workers.
equal the marginal productivity of capital (MPK).
keep the level of capital per worker constant.
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In the Solow growth model of an economy with population growth but no technological change, if
population grows at rate n, then capital grows at rate ______ and output grows at rate ______.

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Answer

n;n
n;0
0;0
0;n
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In the Solow growth model of an economy with population growth but no technological change, if
population grows at rate n, total output grows at rate ______ and output per worker grows at rate
______.
Answer

n; n
n; 0
0;0
0;n
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Assume two economies are identical in every way except that one has a higher population growth rate.
According to the Solow growth model, in the steady state the country with the higher population growth
rate will have a ______ level of total output and ______ rate of growth of output per worker as/than the
country with the lower population growth rate.
Answer

higher; the same


higher; a higher
lower; the same
lower; a lower
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In the Solow growth model, an economy in the steady state with a population growth rate of n but no
technological growth will exhibit a growth rate of output per worker at rate:
Answer

0.

n.
.
(n + ).
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In the Solow growth model, an economy in the steady state with a population growth rate of n but no
technological growth will exhibit a growth rate of total output at rate:
Answer

0.

n.
.
(n + ).
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In the Solow growth model, if two countries are otherwise identical (with the same production function,
same saving rate, same depreciation rate, and same rate of population growth) except that Country
Large has a population of one billion workers and Country Small has a population of ten million
workers, then the steady-state level of output per worker will be ______ and the steady-state growth
rate of output per worker will be ______.
Answer

the same in both countries; the same in both countries


higher in Country Large; higher in Country Large
higher in Country Small; higher in Country Small
higher in Country Large; higher in Country Small
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In the Solow growth model of an economy with population growth but no technological progress, the
steady-state amount of investment can be thought of as a break-even amount of investment because
the quantity of investment just equals the amount of:
Answer

output needed to achieve the maximum level of consumption per worker.


capital needed to replace depreciated capital and to equip new workers.
saving needed to achieve the maximum level of output per worker.
output needed to make the capital per worker ratio equal to the marginal product of
capital.
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In the Solow growth model, the steady-state level of output per worker would be higher if the ______
increased or the ______ decreased.
Answer

saving rate; depreciation rate


population growth rate; depreciation rate
depreciation rate; population growth rate
population growth rate; saving rate
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Question
In the Solow growth model of an economy with population growth but no technological change, a
higher level of steady-state output per worker can be obtained by all of the following except:
Answer

increasing the saving rate.


decreasing the depreciation rate.
increasing the population growth rate.
increasing the capital per worker ratio.
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Question
In the Solow growth model of an economy with population growth but no technological change, which
of the following will generate a higher steady-state growth rate of total output?

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Answer

a higher saving rate


a lower depreciation rate
a higher population growth rate
a higher capital per worker ratio
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Question
The Solow growth model of an economy with population growth but no technological progress can
explain:
Answer

persistent growth in output per worker.


persistent growth in total output.
persistent growth in consumption per worker.
persistent growth in the saving rate.
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Question
In the Solow growth model of an economy with a given production function, depreciation rate, saving
rate, and no technological change, higher rates of population growth produce:
Answer

higher steady-state ratios of capital per worker.


higher steady-state growth rates of output per worker.
higher steady-state growth rates of total output.
higher steady-state levels of output per worker.
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Question
In the Solow growth model of an economy with a given production function, depreciation rate, saving
rate, and no technological change, lower rates of population growth produce:
Answer

lower steady-state ratios of capital per worker.


lower steady-state growth rates of output per worker.
lower steady-state growth rates of total output.
lower steady-state levels of output per worker.
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Question
The Solow model of an economy with population growth but no technological change cannot explain
persistent growth in standards of living because:
Answer

total output does not grow.


depreciation grows faster than output.
output, capital, and population all grow at the same rate in the steady state.
capital and population grow, but output does not keep up.
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Question
With population growth at rate n but no technological change, the Golden Rule steady state may be
achieved by equating the marginal product of capital (MPK):
Answer

net of depreciation to n.
to n.
net of depreciation to the depreciation rate plus n.
to the depreciation rate.
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Question
In the Solow growth model of an economy with population growth but no technological progress, in the
Golden Rule steady state, the marginal product of capital minus the rate of depreciation equals:
Answer

0.
the population growth rate.
the saving rate.
output per worker.
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Question
In the Solow growth model of an economy with population growth but no technological progress, if in
the steady state the marginal product of capital equals 0.10, the depreciation rate equals 0.05, and the
rate of population growth equals 0.03, then the capital per worker ratio ______ the Golden Rule level.
Answer

is above
is below
is equal to
moves to
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Question
In the Solow growth model of an economy with population growth but no technological progress,
increases in capital have a positive impact on steady-state consumption per worker by ______, but
have a negative impact on steady-state consumption per worker by ______.
Answer

increasing the capital to worker ratio; reducing saving in the steady state
reducing investment required in the steady state; increasing saving in the steady state
increasing output; increasing output required to replace depreciating capital
decreasing the saving rate; increasing the depreciation rate
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An increase in the rate of population growth with no change in the saving rate:
Answer

increases the steady-state level of capital per worker.


decreases the steady-state level of capital per worker.
does not affect the steady-state level of capital per worker.
decreases the rate of output growth in the short run.
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Multiple Choice

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Question
Analysis of population growth around the world concludes that countries with high population growth
tend to:
Answer

have high income per worker.


have a lower level of income per worker than other parts of the world.
have the same standard of living as other parts of the world.
tend to be the high-income-producing nations of the world.
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According to Kremer, large populations:
Answer

require the capital stock to be spread thinly, thereby reducing living standards.
place great strains on an economy's productive resources, resulting in perpetual poverty.
are a prerequisite for technological advance and higher living standards.
are not a factor in determining living standards.
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Question
According to Malthus, large populations:
Answer

require the capital stock to be spread thinly, thereby reducing living standards.
place great strains on an economy's productive resources, resulting in perpetual poverty.
are a prerequisite for technological advance and higher living standards.
are not a factor in determining living standards.
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Question
According to the Solow growth model, large populations:
Answer

require the capital stock to be spread thinly, thereby reducing living standards.
place great strains on an economy's productive resources, resulting in perpetual poverty.
are a prerequisite for technological advance and higher living standards.
are not a factor in determining living standards.
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Question
The Malthusian model that predicts mankind will remain in poverty forever:
Answer

underestimated the possibility for technological progress.


failed to predict that scarcity would be eliminated in the modern world.
assumed that prosperity would lead to declining human fertility.
recognized that the ability of natural resources to sustain humans is far greater than the
power of population to consume resources.
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Multiple Choice

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Question
According to the Kremerian model, large populations improve living standards because:
Answer

crowded conditions put more pressure on people to work hard.


there are more people who can make discoveries and contribute to innovation.
more people have the opportunity for leisure and recreation.
most people prefer to live with many other people.
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Question
0.3 0.7

If Y = K L , then the per-worker production function is:


Answer

Y = F(K/L).
Y/L = (K/L)0.3.
Y/L = (K/L)0.5.
Y/L = (K/L)0.7.
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Question
1/2

If y = k , there is no population growth or technological progress, 5 percent of capital depreciates


each year, and a country saves 20 percent of output each year, then the steady-state level of capital
per worker is:
Answer

2.
4.
8.
16.
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Question
1/2

If y = k , the country saves 10 percent of its output each year, and the steady-state level of capital per
worker is 4, then the steady-state levels of output per worker and consumption per worker are:
Answer

2 and 1.6, respectively.


2 and 1.8, respectively.
4 and 3.2, respectively.
4 and 3.6, respectively.
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Question
1/2

Assume that two countries both have the per-worker production function y = k , neither has population
growth or technological progress, depreciation is 5 percent of capital in both countries, and country A
saves 10 percent of output whereas country B saves 20 percent. If A starts out with a capital-labor ratio
of 4 and B starts out with a capital-labor ratio of 2, in the long run:

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Answer

both A and B will have capital-labor ratios of 4.


both A and B will have capital-labor ratios of 16.
A's capital-labor ratio will be 4 whereas B's will be 16.
A's capital-labor ratio will be 16 whereas B's will be 4.
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Question
Assume that a war reduces a country's labor force but does not directly affect its capital stock. Then the
immediate impact will be that:
Answer

total output will fall, but output per worker will rise.
total output will rise, but output per worker will fall.
both total output and output per worker will fall.
both total output and output per worker will rise.
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Question
Assume that a war reduces a country's labor force but does not directly affect its capital stock. If the
economy was in a steady state before the war and the saving rate does not change after the war, then,
over time, capital per worker will ______ and output per worker will grow ______ than it did before the
war.
Answer

decline; faster
increase; faster
decline; more slowly
increase; more slowly
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Question
If a larger share of national output is devoted to investment, then living standards will:
Answer

always decline in the short run but rise in the long run.
always rise in both the short and long runs.
decline in the short run and may not rise in the long run.
rise in the short run but may not rise in the long run.
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Question
If a larger share of national output is devoted to investment, starting from an initial steady-state capital
stock below the Golden Rule level, then productivity growth will:
Answer

increase in the short run but not in the long run.


increase in the long run but not in the short run.
increase in both the short run and the long run.
not increase in either the short run or the long run.
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Question
If the U.S. production function is Cobb-Douglas with capital share 0.3, output growth is 3 percent per
year, depreciation is 4 percent per year, and the Golden Rule steady-state capital-output ratio is 4.29,
to reach the Golden Rule steady state, the saving rate must be:
Answer

17.5 percent.
25 percent.
30 percent.
42.9 percent.
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Question
If all wage income is consumed, all capital income is saved, and all factors of production earn their
marginal products, then:
Answer

the economy will reach a steady-state level of capital stock below the Golden Rule level.
the economy will reach a steady-state level of capital stock above the Golden Rule level.
wherever the economy starts out, it will not grow.
wherever the economy starts out, it will reach a steady-state level of capital stock equal to
the Golden Rule level.
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Question
If an economy moves from a steady state with positive population growth to a zero population growth
rate, then in the new steady state total output growth will be ______ and growth of output per person
will be ______.
Answer

lower; lower
lower; the same as it was before
higher; higher than it was before
higher; lower
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Question
If the production function exhibits decreasing returns to scale in the steady state, an increase in the
rate of population would lead to:
Answer

growth in total output and growth in output per worker.


growth in total output but no growth in output per worker.
growth in total output but a decrease in output per worker.
no growth in total output or in output per worker.
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Question
If the production function exhibits increasing returns to scale in the steady state, an increase in the rate
of growth of population would lead to:
Answer

growth in total output and growth in output per worker.


growth in total output but no growth in output per worker.
growth in total output but a decrease in output per worker.

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no growth in total output or in output per worker.


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Essay

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Question
1/2 1/2

Assume that a country's production function is Y = K L .


a.
What is the per-worker production function y = f(k)?
b.

Assume that the country possesses 40,000 units of capital and 10,000 units of
labor. What is Y? What is labor productivity computed from the per-worker
production function? Is this value the same as labor productivity computed from
the original production function?

c.

Assume that 10 percent of capital depreciates each year. What gross saving rate
is necessary to make the given capital-labor ratio the steady-state capital-labor
ratio? (Hint: In a steady state with no population growth or technological change,
the saving rate multiplied by per-worker output must equal the depreciation rate
multiplied by the capital-labor ratio.)

d.

If the saving rate equals the steady-state level, what is consumption per worker?

Answer

1/2

a. y = k .
b. Y = 20,000; Y/L = 2; y = 2; yes
c. s = 0.2.
d. Consumption per worker will be 1.6.
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Essay

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Question
1/2

Assume that a country's per-worker production is y = k , where y is output per worker and k is capital
per worker. Assume also that 10 percent of capital depreciates per year (= 0.10).
a.
If the saving rate (s) is 0.4, what are capital per worker, production per worker, and
1/2

consumption per worker in the steady state? (Hint: Use sy = k and y = k

to get

1/2

an equation in s, , k, and k , and then solve for k.)


b.

Solve for steady-state capital per worker, production per worker, and consumption
per worker with s = 0.6.

c.

Solve for steady-state capital per worker, production per worker, and consumption
per worker with s = 0.8.

d.

Is it possible to save too much? Why?

Answer a. k = 16; y = 4; consumption per worker is 2.4.


b. k = 36; y = 6; consumption per worker is 2.4.
c. k = 64; y = 8; consumption per worker is 1.6.
d. Yes. If the capital stock gets so big that the extra output produced by more capital is less
than the extra saving needed to maintain it, extra capital reduces consumption per worker. The
saving rate exceeds the Golden Rule rate.
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Question
Suppose that two countries are exactly alike in every respect except that the citizens of country A have
a higher saving rate than the citizens of country B.
a.
Which country will have the higher level of output per worker in the steady
state? Illustrate graphically.
b.

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steady state?

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Answer a. Country A will have the higher level of output per worker.

b. In the steady state, the growth rate of output per worker will be zero in both country A and
country B.
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Question
Suppose that two countries are exactly alike in every respect except that population grows at a faster
rate in country A than in country B.
a.
Which country will have the higher level of output per worker in the steady
state? Illustrate graphically.
b.

Which country will have the faster rate of growth of output per worker in the
steady state?

Answer a. Country B will have the higher level of output per worker.

b. In the steady state, the growth rate of output per worker will be zero in both Country A and
Country B.
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Question
It rains so much in the country of Tropicana that capital equipment rusts out (depreciates) at a much
faster rate than it does in the country of Sahara. If the countries are otherwise identical, in which
country will the Golden Rule level of capital per worker be higher? Illustrate graphically.
Answer The Golden Rule level of capital per worker will be higher in Sahara.

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Question
The economy of Alpha can be described by the Solow growth model. The following are some
characteristics of the Alpha economy:
saving rate (s)
0.20
depreciation rate ( )

0.12

steady-state capital per worker (k)

population growth rate (n)

0.02

steady-state output per worker

20,000

a. What is the steady-state growth rate of output per worker in Alpha?


b. What is the steady-state growth rate of total output in Alpha?
c. What is the level of steady-state consumption per worker in Alpha?
d. What is the steady-state level of investment per worker in Alpha?
Answer a. In the steady state, capital per worker is constant, so output per worker is constant. Thus,
the growth rate of steady-state output per worker is 0.
b. In the steady state, population grows at a 2 percent rate (0.02). Capital must grow at a rate
of 2 percent in order to maintain a constant capital per worker ratio in the steady state;
therefore, given the constant returns to scale production function, total output must increase at
a 2 percent rate.
c. If the saving rate is 20 percent, then the consumption rate is 80 percent (1 0.2).
Steady-state consumption per worker is 16,000, which is 80 percent of steady-state output per
worker.
d. In the steady state, investment per worker equals saving per worker, which is 20 percent of
steady-state output per worker. Thus, steady-state investment per worker is 4,000.
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Question
The initial steady-state level of capital per worker in Macroland is 5. The Golden Rule level of capital
per worker in Macroland is 8.
a.
What must change in Macroland to achieve the Golden Rule steady state?

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b.

Why might the Golden Rule steady state be preferred to the initial steady state?

c.

Why might some current workers in Macroland prefer the initial steady state to
the Golden Rule steady state?

Answer a. The saving rate in Macroland must be increased to achieve the higher capital per worker
ratio of the Golden Rule steady state.
b. Consumption per worker is higher in the Golden Rule steady state than in the initial steady
state.
c. In the transition from the initial steady state to the Golden Rule steady state, the level of
consumption per worker must initially decrease to accumulate the additional capital required
for the Golden Rule steady state. Thus, workers who do not want to sacrifice current
consumption for future consumption may prefer the initial steady state.
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Question
The economies of two countries, North and South, have the same production functions, depreciation
rates, and saving rates. The economy of each country can be described by the Solow growth model.
Population growth is faster in South than in North.
a.
In which country is the level of steady-state output per worker larger? Explain.
b.

In which country is the steady-state growth rate of output per worker larger?

c.

In which country is the growth rate of steady-state total output greater?

Answer a. North will have a higher level of steady-state output per worker because the population
growth is faster in South. The same saving in both countries means that investment in both
countries will be the same. However, capital will be spread more thinly per worker in the
South, where the population is growing more rapidly. Given the same production functions,
output per worker will be higher in the North because it has a higher capital per worker ratio
than the South.
b. In the steady state in both countries, capital per worker is constant, so output per worker is
constant. The growth rate of output per worker is zero in both North and South.
c. In the steady state, total output grows at the rate of population growth. Since South has a
higher rate of population growth, the growth rate of total output will be higher in South than in
North.
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Question
The economies of two countries, Thrifty and Profligate, have the same production functions and
depreciation rates. There is no population growth or technological progress in either country. The
economies of each country can be described by the Solow growth model. The saving rate in Thrifty is
0.5. The saving rate in Profligate is 0.3.
a.
In which country is the level of steady-state output per worker larger? Explain.
b.

In which country is the steady-state growth rate of output per worker larger?

c.

In which country is the growth rate of steady-state total output greater?

Answer a. Thrifty will have the higher level of steady-state output per worker. With a higher saving rate
in Thrifty, there will be more saving, more investment, and, consequently, a higher
steady-state capital per worker ratio. For the same production function, the higher capital per
worker ratio will produce a higher level of steady-state output per worker.
b. In the steady state in both countries, capital per worker is constant, so output per worker is
constant. The growth rate of output per worker is zero in both Thrifty and Profligate.
c. Since there is no population growth or technological change in the steady state, total output
will be constant in both countries. The growth rate of total output will be zero in both Thrifty
and Profligate.
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Essay

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Question
Many policymakers are concerned that Americans do not save enough. Using the Solow growth model
of an economy with no technological change and no population growth, explain why:
a.
for a given production function and depreciation rate, the saving rate determines
the level of output per worker.
b.

a higher saving rate will not necessarily generate more consumption per worker.

c.

a higher saving rate will not produce a faster steady-state growth rate of output
per worker.

Answer a. The saving rate is the proportion of output that is saved and the proportion of output
allocated to investment. A larger amount of investment can maintain a larger ratio of capital
per worker and, therefore, a higher level of output per worker can be produced than with a
smaller saving rate.
b. If a high rate of saving generates a level of capital per worker greater than the Golden Rule
level of capital per worker, then consumption per worker will be smaller than at the Golden
Rule level, with a lower saving rate.
c. In the steady state, the capital per worker ratio is constant, so output per worker is constant.
The steady-state growth rate of output per worker is zero regardless of the saving rate.
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Question
One of the key distinctions made in the analysis of the Solow growth model is between changes in
levels and changes in growth rates. How does an increase in the rate of population growth change the
steady-state levels and growth rates of output and output per worker in the Solow model with no
technological change?
Answer The increase in the population growth rate will increase the steady-state level of output and
the steady-state growth rate of output (which will grow at a rate equal to the new higher growth
rate of population). The increase in the population growth rate will not change the steady-state
growth rate of output per worker which in the long run is zero.
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Question
Explain the two uses of saving in the steady state in the Solow model of an economy with population
growth but no technological progress.
Answer Saving supplies (1) the investment to replace the depreciating capital and (2) the investment
to equip new workers with the same amount of capital as existing workers in the economy so
that the steady-state capital per worker ratio does not change.
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Question
Compare and contrast the impact of a faster rate of population growth on the standard of living (output
per worker) in the models by Solow, Malthus, and Kremer.
Answer In the Solow growth model, a faster rate of population growth reduces output per worker
because capital must be spread more thinly over the supply of workers. In Malthus's model,
faster population growth exhausts the supply of food and leads to a lower standard of living. In
Kremer's model, faster rates of population growth increase the pool from which new ideas and
innovations can be drawn and thereby improves the standard of living.
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Question
Consider two countries that are otherwise identical (have the same saving rates and depreciation
rates), but the population of Country Large is 100 million, while the population of Country Small is 10
million. Use the Solow model with no technological change to compare the steady-state levels of output
per worker if:
a.
the population growth rates are the same in the two countries.
b.

the population growth rate is higher in Country Large.

Answer a. The steady-state levels of output per worker will be the same in both countries because the
assumption of constant returns to scale means that the absolute size of the economy,
measured by number of workers, does not affect output.
b. The steady-state level of output per worker will be lower in Country Large, because with the
same saving rate but a faster growing population, Country Large will not be able to maintain
as high a capital per worker ratio as Country Small.
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Question
Larger quantities of steady-state capital have both a positive and negative effect on consumption per
worker in the Solow model (assume no population growth or technological progress). Explain.
Answer Larger quantities of steady-state capital increase the capital per worker ratio and increase the
quantity of output; therefore, a greater quantity of output is available for consumption per
worker. Large quantities of steady-state capital generate more depreciation which must be
replaced from output in order to maintain the steady state, thus reducing the amount of output
available for consumption per worker.
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