In the Solow model, in every period, a fraction of total output ________ next period's capital stock, which ________.
A) is saved; reduces
B) depreciates; adds to
C) is saved; adds to
D) is consumed; adds to
E) is consumed; reduces

Question

Quizplus · Accepted Answer

In the Solow model, a fraction of total output is saved, which is used to add to next period's capital stock. This is represented by the equation: K(t+1) = sY(t) + (1-d)K(t), where s is the saving rate, Y is output, d is the depreciation rate, and K is the capital stock. Choice A is partially correct but incorrect overall, as the saved fraction of output does not reduce next period's capital stock - it is used to add to it. Choice B is completely incorrect, as the depreciating capital stock is not added to in every period. Choice D and E are completely incorrect, as the saved fraction of output is not consumed, and hence does not add to or reduce next period's capital stock.

In the Solow Model, in Every Period, a Fraction of Total