In the Solow growth model, from an initial steady state with fixed values of A,
ID: 1096869 • Letter: I
Question
In the Solow growth model, from an initial steady state with fixed values of A, d, and n, an increase in the national saving rate causes the standard of living to
grow at a slower rate temporarily, and then return to the initial growth rate.
grow at a permanently faster rate.
not change at all in the short run or the long run.
rise temporarily, and then fall back to its initial level.
rise and then hold constant at a new higher level.
Please Explain
grow at a slower rate temporarily, and then return to the initial growth rate.
grow at a permanently faster rate.
not change at all in the short run or the long run.
rise temporarily, and then fall back to its initial level.
rise and then hold constant at a new higher level.
Explanation / Answer
Answer is...rise and then hold constant at a new higher level.
Fundamental to any discussion of economic issues is the topic of growth. Growth entails the expansion of an economy's productive capacity, its output, its income, and the living standards of its citizens. In this topic we will discuss the basic concept of growth and how additions to capital, population, savings, and technology impact growth. An important part of the discussion will deal with the convergence theorem, which says that rapidly growing less developed economies will eventually converge to living standards enjoyed in developed countries such as the United States and Japan.
Increasing returns leads to the conclusion that long-run economic growth will not be restricted by steady state constraints. Growth above steady-state levels will persist as long as production exhibits increasing returns to scale. Furthermore, with increasing returns, the convergence of less-developed countries to economic living standards equal to today's developed countries may not occur, or at least take significantly longer to achieve. The absence or delay of convergence should not be viewed as negative. With proper conditions, LDCs will grow rapidly, easily surpassing the living standards enjoyed today in the United States, Japan and in other developed countries. However, it may take much longer for them to catch-up at any given point in time.