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. If the government reduced the budget deficit (ceteris paribus) with a tax increase on personal income to create an increase in the supply of loanable funds (to the business sector), then we would expect to see economic growth rates turn positive as we move toward the new steady state and the nation's capital stock t 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 steady 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 economic growth rates stay the same as we move toward the new steady state and the nation's capital stock to grow from its current level. o

Explanation / Answer

Answer is b

The nation growth rate will increase initially till it reaches steady state where the capital stock per worker is more. note steady state growth rate remains same but till transition growth rate will increase. Please upload full question next time as question can't be fully seen

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