An increase in ________ leads to a higher steady-state level of output, and an increase in ________ leads to a lower steady-state level of output.
A) the saving rate; the depreciation rate
B) the saving rate; productivity
C) productivity; the initial capital stock
D) the depreciation rate; the labor stock
E) None of these answers are correct.

Question

Quizplus · Accepted Answer

According to the Solow model, an increase in saving rate leads to a higher steady-state level of output because it increases the amount of capital available for production. On the other hand, an increase in productivity causes a shift in the production function, leading to an increase in output at all levels of capital stock, including the steady state. Therefore, B is the correct answer. The other choices do not have a direct impact on the steady-state level of output according to the Solow model.

An Increase in ________ Leads to a Higher Steady-State Level