If the depreciation and saving rates are constant, the economy eventually will reach the steady state in the Solow model because of:
A) the lack of productivity.
B) increasing returns to capital in production.
C) constant returns to capital in production.
D) diminishing returns to capital in production.
E) increasing returns to labor in production.

Question

Quizplus · Accepted Answer

In the Solow model, the steady state is reached when the investment rate equals the depreciation rate, and the capital stock per worker stops growing. At the steady state, the marginal product of capital (MPK) equals the rate of depreciation, and the economy experiences diminishing returns to capital, which means that each additional unit of capital will lead to a smaller increase in output. This is why choice D - "diminishing returns to capital in production" - is the correct answer. The other choices are not relevant factors in determining the steady state in the Solow model.

If the Depreciation and Saving Rates Are Constant, the Economy