Suppose a country’s depreciation rate is 4% per annum, its population expands by 1% each year, and its efficiency of labour grows at a 1% annual rate. In the steady state of the Solow model with technological progress, which of the following options is correct? Note: This is a multiple-answer question; thus, more than one option may be correct. Select all correct options. a. Capital per effective worker grows at a 0% rate. b. Output per actual worker grows at a 2% rate. c. Output per effective worker grows at a 1% rate. d. Total output grows at a 2% rate.
Question
Suppose a country’s depreciation rate is 4% per annum, its population expands by 1% each year, and its efficiency of labour grows at a 1% annual rate.
In the steady state of the Solow model with technological progress, which of the following options is correct?
Note: This is a multiple-answer question; thus, more than one option may be correct. Select all correct options.
a.
Capital per effective worker grows at a 0% rate.
b.
Output per actual worker grows at a 2% rate.
c.
Output per effective worker grows at a 1% rate.
d.
Total output grows at a 2% rate.
Solution
In the Solow model with technological progress, the steady state is characterized by constant capital per effective worker. This means that the capital per effective worker is not growing, so option a is correct.
Output per actual worker is growing at the rate of technological progress, which is given as 1% per year. Therefore, option b is incorrect.
Output per effective worker is constant in the steady state of the Solow model. This means it is not growing, so option c is incorrect.
Total output grows at the rate of population growth plus the rate of technological progress. In this case, that's 1% (population growth) + 1% (technological progress) = 2%. Therefore, option d is correct.
So, the correct options are a and d.
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