In the Solow model, an increase in the investment rate will _____ the amount of capital needed to achieve a steady state of output.
A) increase
B) decrease
C) not affect
D) equal

Question

Quizplus · Accepted Answer

According to the Solow model, an increase in the investment rate leads to a higher level of capital accumulation, which in turn increases output. However, as the amount of capital increases, the marginal product of capital falls, eventually resulting in diminishing returns to capital. Therefore, to achieve a steady state level of output, the economy must have a higher level of capital accumulation than before the increase in the investment rate. Therefore, an increase in the investment rate will increase the amount of capital needed to achieve a steady state of output.

In the Solow Model, an Increase in the Investment Rate