If the marginal product of capital net depreciation equals 8 percent, the rate of growth of population equals 2 percent, and the rate of labor-augmenting technical progress equals 2 percent, to reach the Golden Rule level of the capital stock, the ____ rate in this economy must be _____.
A) saving; increased.
B) population growth; decreased
C) depreciation; decreased
D) total output growth; decreased

Question

Quizplus · Accepted Answer

To reach the Golden Rule level, the saving rate in the economy must be increased. This is because the Golden Rule level of capital stock occurs when the marginal product of capital equals the rate of time preference plus the rate of depreciation, which in this case is 8% (depreciation) + 0% (time preference) = 8%. Since the rate of labor-augmenting technical progress plus population growth is 4%, the saving rate needs to be increased to achieve the Golden Rule level. Therefore, option A is the correct answer. The other options are not relevant to reaching the Golden Rule level of capital stock.

If the Marginal Product of Capital Net Depreciation Equals 8