Question

According to the Solow growth model, all the following is true except: a) A country with a lower population growth rate (all else the same) will have a higher level of output per person in the long run. b) Less developed countries will tend to catch up with rich countries in output per-person if they have comparable rates of saving, depreciation, and population growth c) The growth rate in output per person is higher if a country is farther away from its steady state. d) If a country lowers its saving rate, it will have a lower growth rate permanently.

Answer 1

According to the Solow growth model, all the following is true except:

Correct choice:

d) If a country lowers its saving rate, it will have a lower growth rate permanently.

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As per the Solow model, the effect of a lower saving rate is a temporary decrease in the growth rate. In the long run, it returns to its steady state rate of growth. There will be a temporary adjustment process. There will be a lack of capital accumulation, but this will be temporary.

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Further, a lower population growth does imply a higher level of output per person. Less developed countries catch up with rich countries, termed as convergence, provided that the other conditions are in place. A country grows faster initially, when it is farther from the steady state, and then begins to slow down.