Figure 8.2

-Refer to Figure 8.2.Suppose the economy is originally in steady state at k*₂.All else equal,if the labour force growth rate increases ,

Question

Figure 8.2 -Refer to Figure 8.2.Suppose the economy is originally in steady state at k*₂.All else equal,if the labour force growth rate increases ,

Quizplus · Accepted Answer

According to the Solow model, an increase in the labor force growth rate increases the break-even investment level, which is defined as (d + n)k, where d is the depreciation rate, n is the population growth rate, and k is the capital-labor ratio. With the increase in the labor force growth rate, the break-even investment level will shift from (d + n₂)k to (d + n₁)k, as the question states. This means that in order to maintain the steady state capital-labor ratio, investment must be increased to (d + n₁)k. Therefore, the capital-labor ratio will move from k*2 to k*₁.

Figure 8.2 -Refer to Figure 8.2.Suppose the Economy Is Originally in Steady