Suppose we started out at the steady state capital stock in the basic Solow grow

Question

Suppose we started out at the steady state capital stock in the basic Solow growth model. Ift subsequently were an increase in the demand for loanable funds due to more favorable tax treatment of business investment, ceteris paribus (i.e, holding ot see here ther factors constant), then we would expect to economic growth rates turn positive as we move toward the new steady state and the nation's capital stock to decrease from its current level. o economic growth rates turn negative as we move toward the new steady state and the nation's capital stock to decrease from its current level o o economic growth rates turn positive as we move toward the new steady state and the nation's capital stock to grow from its current level. o economic growth rates turn negative as we move toward the new teady state and the nation's capital stock to decrease from its current level. economic growth rates turn negative as we move toward the new steady state and the nation's capital stock to grow from its current level. o

Explanation / Answer

Correct option is (3).

An increase in investment demand in loanable funds market will increase the capital stock over time. This makes the economy move toward a new steady state equilibrium in which economic growth is higher.

Economic growth rate = Original steady state growth rate + Rate of new capital investment

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