Select the scenario that will decrease the steady-state level of capital per worker in the Solow model with technological progress. a. A decrease in the population growth rate due to a sharp fall in immigration. b. A decrease in the saving rate due to better investment incentives. c. An increase in the saving rate due to a reduction in consumers’ marginal propensity to consume. d. A decrease in the depreciation rate due to improved maintenance of capital goods.
Question
Select the scenario that will decrease the steady-state level of capital per worker in the Solow model with technological progress.
a.
A decrease in the population growth rate due to a sharp fall in immigration.
b.
A decrease in the saving rate due to better investment incentives.
c.
An increase in the saving rate due to a reduction in consumers’ marginal propensity to consume.
d.
A decrease in the depreciation rate due to improved maintenance of capital goods.
Solution
The scenario that will decrease the steady-state level of capital per worker in the Solow model with technological progress is:
b. A decrease in the saving rate due to better investment incentives.
Here's why:
The Solow model with technological progress suggests that the steady-state level of capital per worker is determined by the saving rate, the depreciation rate, the rate of technological progress, and the population growth rate.
In this model, a higher saving rate means that more of the current income is being set aside for future use, which leads to an increase in the capital stock. Therefore, a decrease in the saving rate would lead to a decrease in the steady-state level of capital per worker.
The other options (a, c, and d) would not decrease the steady-state level of capital per worker. A decrease in the population growth rate or the depreciation rate, or an increase in the saving rate, would all lead to an increase in the steady-state level of capital per worker.
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