The next questions refer to the following.
Suppose the economy has the production function Y = .8K, gross investment is 10% of national income, and the rate of depreciation is 5% of the capital stock.
-The capital stock of this economy
A) is constant
B) will grow by 2% per year
C) will grow by 3% per year
D) will grow by 5% per year
E) will grow by 6% per year

Question

Quizplus · Accepted Answer

The net investment is the difference between gross investment (10% of national income) and depreciation (5% of the capital stock). Since Y = 0.8K, gross investment is 0.1Y = 0.1(0.8K) = 0.08K. Depreciation is 0.05K. Therefore, net investment is 0.08K - 0.05K = 0.03K, indicating a 3% growth in the capital stock.

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