Question

1- Which of the choices below is false concerning capital deepening in the Solow Model?

1. A country that has a higher savings/investment rate ceteris paribus will accumulate more capital per worker.
2. The change in the capital/labor ratio with respect to time is positive and the ratio itself increases
3. A country with more capital per worker than before will produce more output per worker. In short, the worker is more productive.
4. A greater amount of capital invested per worker and positive population change results in a negative change in the capital/labor ratio with respect to time. The ratio itself decreases.

2- What condition must be met for a decentralized economy to be dynamically inefficient?

1. .The Diamond Model shows it is possible to accumulate capital beyond the golden-rule level
2. .A balanced growth path is dynamically inefficient if the real rate of growth is more than the growth rate of the economy
3. .Investment is greater than net capital income
4. .It is impossible to be dynamically inefficient in the Diamond Model

Answer 1

1. 'C' is correct answer because,

Solow model states that an economic expansion will not continue indefinitely through capital deepening alone. This is partly due to diminishing returns and wear & tear (depreciation). Investment is also required to increase the amount of capital available to each worker in the system and thus increase the ratio of capital to labour.

2. 'A'is correct answer because,

the diamond model admits the possibility of inefficiency and it is possible that to accumulate capital beyond the golden rule level.