Question

What is the impact of δ on the steady-state solution of the Solow model? Why is this?

Answer 1

refers to Depreciation in solow model

Increase in
1) Intuitively: economist think that higher depreciation ()should lead to lower capital (k) accumulation and lesser/lower steady-state level of k and y
2) Graphically: An rise in makes the break-even line ( n + g + ) k steeper, leading to k < 0 at original k* and movement to the left side

3) Economy converges to new steady-state growth path with a lesser k* and y*

4) Again, all these are level effects, not growth effects: the growth rates are the equal ( same)

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