Advising Cluster: HLS (h. instructure.com/courses/1664045/quizzes/2386360/take C

Question

Advising Cluster: HLS (h. instructure.com/courses/1664045/quizzes/2386360/take Consider our graph of the basic Solow growth model. s6 ealy sale On the graph above: y represents real output (or income) per worker, y-FE) is the production function is the capital stock per worker, is the savings rate: is the rate of depreciation of capital: represents business investment (purchases of capital) per worker);-LF' stands for Loanable Funds. (For purposed of intuition, think of capital as "machines") If we started out with a capital (per worker) stock lower than the steady-state stock ( , above), we would expect to see which of the following happen over time? O Negative growth rates while the capital stock decreases O Positive growth rates while the capital stock increases Negative growth rates while the capital stock increases Positive growth rates while the capital stock stays less than ko. ton the graph above) Positive growth rates while the capital stock decreases

Explanation / Answer

If we start out with a lower capital for work then what is required at the steady state level, we can see that we will be on the left side of the current steady state level of capital per worker. At this rate investment exceeds depreciation so there will be an increase in the level of capital for worker and hence the growth rate will increase.

Correct option is positive growth rate while capital stock increases.

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