Question

In the Solow growth model with population growth but no technological progress, if in the steady state the marginal product of capital equals 0.10, the depreciation rate equals 0.05, and the rate of population growth equals 0.03, then the capital per worker ratio ____ the Golden Rule level.

1. A) is above

2. B) is below

3. C) is equal to

4. D) will move to

Answer 1

Ans: is below

Explanation:

The golden rule says:

marginal product of capital = population growth rate + depreciation rate

                                          = 0.03 + 0.05

                                          = 0.08

Since 0.08 is less than 0.10, it means capital per worker ratio is below the Golden Rule level.