Figure 10-3

-Initially,the economy is at point B in Figure 10-3 above.We may conclude that over time,
A)per person saving and steady state investment will remain stable at points C and D respectively.
B)per person capital will grow,point D to E since per capita savings exceed steady state investment,point C is greater than point D.
C)per person capital will grow,point D to E since per capita savings is less than steady state investment,point C is greater than point D.
D)per person saving and steady state investment will remain stable at points D and C respectively.

Question

Figure 10-3
 
-Initially,the economy is at point B in Figure 10-3 above.We may conclude that over time,
A)per person saving and steady state investment will remain stable at points C and D respectively. 
B)per person capital will grow,point D to E since per capita savings exceed steady state investment,point C is greater than point D. 
C)per person capital will grow,point D to E since per capita savings is less than steady state investment,point C is greater than point D. 
D)per person saving and steady state investment will remain stable at points D and C respectively.

Quizplus · Accepted Answer

According to the Solow model, an economy will converge to a steady state where investment equals depreciation. In this case, initially, the economy is at point B, which represents the steady state level of capital per person (k*). If the economy is above the steady state level of capital per person (k*), then the per capita savings (s) are greater than the steady state investment (delta*k), and the capital per person (k) grows towards the steady state level of capital per person (k*). Therefore, per person capital will grow, point D to E since per capita savings exceed steady state investment, point C is greater than point D.

Figure 10-3 -Initially,the Economy Is at Point B in Figure 10-3 Above.We