Question

Based on our understanding of Solow model, which of the following will cause a permanent increase in growth? none of the other answers is correct.

an increase in capital accumulation

an increase in education spending

an increase in the saving rate

a decrease in the depreciation rate

Answer 1

Based on a conceptual overview of the Neoclassical Solow Growth Model, an increase in educational spending implies higher availability of human capital and skills in the economy that can lead to economic growth and higher output. An increase in the savings rate in the economy leads to higher potential investment leading to economic growth and better living standards in the short-run and a reduction in depreciation rate of the existing capital inputs or factors of production implies higher per capita or per person capital stock in the economy leading to higher per capita output and economic growth. An increased accumulation implies higher availability of capital inputs or resources or capital stock that can induce economic growth and higher output. However, based on the model, the economic growth induced by all these factors or changes in the economy would lead to the steady-state level and beyond which the economic growth becomes stagnant or it stops. Therefore, the economic growth impelled by all these factors are temporary and is mainly aimed at convergence to the steady-state level. The only factor or criteria that can lead to long-term or permanent economic growth and living standards under the Solow Model would be consistent technological improvements or progress which can enhance the productive capacities and efficiency level of the existing factors or inputs of production such as land, labor, capital, etc. leading to higher factor productivity and a sustainable output and economic growth. In this context, technological advancement or improvement in the economy or production process would lead to a higher capital-technology ratio allowing the capital stock and output to grow at a constant rate. Therefore, technological progress in the model can lead to a balanced growth path. Hence, the answer, in this case, would be the 1st option given in the answer choices or options or none of other answers is correct.