In the context of the Solow model,new ideas shift both the production function and the investment function upward.

Question

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In the Solow model, new ideas (or technological progress) are represented by an exogenous variable called total factor productivity (TFP), which leads to an increase in the production function. This means that for the same level of capital and labor inputs, the amount of output produced increases with TFP. Additionally, new ideas also affect the investment function, as they create new opportunities for profitable investment, leading to higher savings and investment rates in the economy. Therefore, both the production function and the investment function shift upward in response to new technological ideas.

In the Context of the Solow Model,new Ideas Shift Both