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if investment is smaller than capital depreciation, then which of the following is correct: a. Next...

if investment is smaller than capital depreciation, then which of the following is correct: a. Next period's capital is greater than the current period's capital B. Next period's capital is smaller than the current period's capital c. Next period's capital is equal to the current period's capital

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Answer #1

According to solow model, change in capital stock is given by the equation

Dk = i – dk, which is stating that the stock of capital increases due to additions (created by investment) and decreases due to subtractions (caused by depreciation).

i=investment

d=rate of depreciation k=capital stock

Dk=change in capital stock

If investment is smaller than capital depreciation (i < dk) then Dk will be negative which means capital stock will decrease.Hence,next period capital will be less than current period's capital.

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