An increase in the __________ leads to a higher steady-state level of output;and an increase in __________ leads to a lower steady-state level of output.
A)saving rate;depreciation rate
B)saving rate;productivity
C)productivity;the initial capital stock
D)depreciation rate;the labor stock
E)none of the above

Question

Quizplus · Accepted Answer

According to the Solow model, an increase in the saving rate leads to a higher steady-state level of output. This is because a higher saving rate means more investment, which leads to more capital accumulation and higher productivity. On the other hand, an increase in productivity leads to a higher steady-state level of output, as it makes the existing capital stock more productive. An increase in depreciation rate or a decrease in the initial capital stock would lead to a lower steady-state level of output. The labor stock is assumed to grow at a constant rate in the Solow model and does not affect the steady-state level of output.

An Increase in the __________ Leads to a Higher Steady-State