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 ($$y^*$$)?

Accepted Answer

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

Question 3

Which of the following best explains why, according to the Solow model, poor OECD countries in 1960 grew faster than rich ones between 1960 and 2014?

Accepted Answer

They were further below their steady state, so their growth rates were higher.

Question 4

If the depreciation rate increases in the Solow model, what happens to the steady-state capital stock ($$K^*) $$and output ($$Y^*$$)?

Accepted Answer

Both $$K^*$$ and $$Y^*$$ decrease.

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 technology remained constant?

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

If a country experiences a permanent increase in technology ($$A$$), what is the predicted effect on steady-state output and capital in the Solow model?

Accepted Answer

Both steady-state output and capital increase.

Question 8

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

Accepted Answer

It remains constant in the steady state.

Question 9

Refer to the investment rate graph for South Korea and the Philippines. What does the Solow model predict about their relative steady-state incomes, assuming similar technology and depreciation rates?

Accepted Answer

South Korea should have a higher steady-state income per capita.

Question 10

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

Accepted Answer

The farther below its steady state, the faster an economy grows.

Question 11

Suppose a country is currently above its steady-state capital stock. According to the Solow model, what will happen to its capital stock over time?

Accepted Answer

It will decrease toward the steady-state level.

Question 12

If the production function is $$Y = A K$$^{1/2}$$ and the saving rate s$ increases, what is the effect on steady-state output (Y$$^*$$)?

Accepted Answer

Steady-state output increases, but less than proportionally to the increase in $$s.$$

Question 13

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

Accepted Answer

Capital accumulation alone can sustain long-run economic growth.

Question 14

If two countries have the same depreciation rate and technology, but different saving rates, what does the Solow model predict about their steady-state capital per worker?

Accepted Answer

The country with the higher saving rate will have higher steady-state capital per worker.

Question 15

Which real-world observation is consistent with the Solow model's prediction for OECD countries between 1960 and 2014?

Accepted Answer

Countries with lower initial per capita GDP grew faster.

Question 16

In the Solow model, what is the effect of a permanent increase in the investment rate on consumption in the long run?

Accepted Answer

Consumption per person increases, but by less than output per person.

Question 17

Which of the following is a strength of the Solow model?

Accepted Answer

It provides a theory for the long-run level of income in a country.

Question 18

If a country experiences a negative shock that reduces its capital stock below the steady state, what does the Solow model predict will happen to its growth rate?

Accepted Answer

The growth rate will increase until the steady state is reached.

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

Study Guide - Practice Questions

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