In a simple version of the Solow growth model with endogenous population growth, a country can escape the poverty trap by
A)lowering the savings rate and devoting more resources to consumption
B)lowering population growth
C)raising the savings rate
D)both A and B
E)both B and C

Question

In a simple version of the Solow growth model with endogenous population growth, a country can escape the poverty trap by
A)lowering the savings rate and devoting more resources to consumption
B)lowering population growth
C)raising the savings rate
D)both A and B 
E)both B and C

Quizplus · Accepted Answer

In the Solow growth model with endogenous population growth, the country's steady-state level of capital per worker depends on the savings rate and population growth rate. The country will be in a poverty trap if the population growth rate is higher than the savings rate, as the diminishing returns to capital means that the country is not able to accumulate enough capital per worker to sustain economic growth. To escape the poverty trap, the country must increase its savings rate and/or decrease its population growth rate. Therefore, the best choice is E, as both raising the savings rate and lowering the population growth rate will lead to an increase in the steady-state level of capital per worker and help the country escape from the poverty trap. Lowering the savings rate (choice A) will reduce the accumulation of capital, which will make it harder to escape the poverty trap, and it will lead to less consumption in the short run.

In a Simple Version of the Solow Growth Model with Endogenous