Use the following graph to answer the following questions.

-Suppose that the level of capital is 100,000,the depreciation rate is 5 percent,and investment is equal to 5,000.In this case,you would expect that
A) real gross domestic product will increase.
B) real gross domestic product will decrease.
C) real gross domestic product will remain unchanged.
D) the steady state value of capital will increase.
E) the steady state value of capital will decrease.

Question

Use the following graph to answer the following questions.
 
-Suppose that the level of capital is 100,000,the depreciation rate is 5 percent,and investment is equal to 5,000.In this case,you would expect that
A) real gross domestic product will increase. 
B) real gross domestic product will decrease. 
C) real gross domestic product will remain unchanged. 
D) the steady state value of capital will increase. 
E) the steady state value of capital will decrease.

Quizplus · Accepted Answer

When capital is at 100,000 and there is a depreciation rate of 5%, we can calculate that the steady state capital value is 500,000. However, since investment is only 5,000, the capital stock is not increasing fast enough to reach the steady state value. This means that real gross domestic product will not increase, decrease or remain unchanged - it will be in a state of transition towards the steady state value of capital. Therefore, the best choice is C, that real gross domestic product will remain unchanged.

Use the Following Graph to Answer the Following Questions