Question

1. In the Solow model without exogenous technological change, per capita income will grow in the long term as long as the country has an initial level of capital below the steady state level of capital (k o < k ⋅)
TRUE OR FALSE?

2. In the Solow model without exogenous technological change, per capita income will grow in the short term as long as the country has an initial level of capital below the steady state level of capital (k o < k ⋅)

TRUE OR FALSE?

3. What is the growth rate of the aggregate level of capital (K) -be aware that is different from the per capita level (k)- in steady state?
a) zero
b) equal to the depreciation rate of capital
c) equal to the population growth rate
d) it depends on the initial level of capital

Answer 1

1)True, In the Solow model without exogenous technological change, per capita income will grow in the long term but a constant rate characterized by constant returns to scale in the long-run. That is, after the economy has time to adjust, the capital-labor ratio increases, and so does the output-labor ratio (per capita income) but not the rate of growth.

2) True, In the Solow model without exogenous technological change, per capita income will grow in the short term because there are diminishing returns to factor inputs in the short-run.

3) The growth rate of the aggregate level of capital (K) is the change in initial capital stock and this changes capital per worker until economy reaches its steady-state. so, it depends on initial level of capital.

Option d) is correct.