Question 1

According to the Solow model, what happens to the growth rate of output per person as an economy approaches its steady state?

Accepted Answer

It decreases and approaches zero.

Question 2

Suppose a country increases its saving rate from 20% to 30%. According to the Solow model, what is the effect on steady-state output per capita?

Accepted Answer

Steady-state output per capita will increase, but by less than 50%.

Question 3

Which of the following best explains why, in the Solow model, capital accumulation alone cannot sustain long-run economic growth?

Accepted Answer

Because of diminishing returns to capital.

Question 4

If a country is far below its steady-state level of capital, what does the principle of transition dynamics predict about its growth rate?

Accepted Answer

It will grow faster than countries near their steady state.

Question 5

Given the equation $$\frac{y^*_{Korea}}{y^*_{U.S.}} = \left(\frac{\overline{A}_{Korea}}{\overline{A}_{U.S.}}\$$right)^{3/2}$$ 	imes \left(\frac{\overline{s}_{Korea}}{\overline{s}_{U.S.}}\$$right)^{1/2}$$, what would happen to Korea's steady-state output per capita relative to the U.S. if Korea's investment rate doubled while productivity remained constant?

Accepted Answer

It would increase by a factor of $$\sqrt{2}.$$

Question 6

Based on the Solow model, what is the effect of a permanent increase in the depreciation rate on the steady-state level of capital and output?

Accepted Answer

Both steady-state capital and output decrease.

Question 7

Refer to the graph 'Growth Rates in the OECD, 1960–2014.' What general relationship between initial per capita GDP and subsequent growth rates does the Solow model predict for these countries?

Accepted Answer

Countries with lower initial per capita GDP grow faster.

Question 8

If a country experiences a permanent increase in total factor productivity (A), what is the predicted effect on steady-state output per capita according to the Solow model?

Accepted Answer

Steady-state output per capita will increase.

Question 9

According to the Solow model with population growth, what happens to output per person in the long run if the population growth rate increases?

Accepted Answer

Output per person decreases.

Question 10

Suppose two countries have the same depreciation rate and technology, but different investment rates. According to the Solow model, which country will have a higher steady-state output per capita?

Accepted Answer

The country with the higher investment rate.

Question 11

Based on the Solow model, what is the main reason why poor countries might grow faster than rich countries, as observed in the OECD data?

Accepted Answer

Poor countries are further below their steady state and thus experience faster growth.

Question 12

Which of the following is a key weakness of the Solow model as discussed in the study materials?

Accepted Answer

It does not provide a theory of sustained long-run economic growth.

Question 13

If the investment rate in the Philippines had matched that of South Korea from 1950 to 2014, what would the Solow model predict about the Philippines' steady-state output per capita relative to its actual historical path?

Accepted Answer

It would be higher than its actual historical path.

Question 14

Consider the Solow model with the production function $$Y = A K$$^{1/2}$$ L$$^{1/2}$$. If the saving rate increases by 10%, by approximately how much does steady-state output increase?

Accepted Answer

By about 5%.

Question 15

Which of the following best describes the transition dynamics in the Solow model?

Accepted Answer

The economy gradually moves toward the new steady state, with faster changes when further away.

Question 16

If a country’s capital stock is above its steady-state level, what will happen according to the Solow model?

Accepted Answer

The capital stock will decline toward the steady-state level.

Question 17

Which of the following is NOT a prediction of the Solow model?

Accepted Answer

Capital accumulation can sustain long-run growth in output per person.

Question 18

Based on the Solow model, what is the effect of a permanent increase in the saving rate on consumption per person in the long run?

Accepted Answer

Consumption per person will increase, but not as much as output per person.

Question 19

Which of the following statements is supported by the global data on growth rates and initial income (second graph)?

Accepted Answer

There is no clear relationship between initial income and growth rates globally.

Question 20

In the Solow model, what is the main reason why two countries with similar depreciation rates and technologies might have different steady-state levels of output per capita?

Accepted Answer

Differences in their investment (saving) rates.

The Solow Growth Model: Steady State, Transition Dynamics, and Cross-Country Growth

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