Using the Harrod-Domar growth model,suppose the saving rate for an economy is given.If the aggregate production becomes more capital intensive,the capital-output ratio v will ________ and the long-run growth rate of GDP will ________.

Question

Quizplus · Accepted Answer

According to the Harrod-Domar growth model, the long-run growth rate of GDP is directly proportional to the savings rate and inversely proportional to the capital-output ratio. If the aggregate production becomes more capital intensive, it means that more capital is required to produce the same amount of output. Therefore, the capital-output ratio, v, will increase. As a result, the long-run growth rate of GDP will decrease according to the Harrod-Domar growth model. Thus, the correct option is C, which states that the capital-output ratio will increase, and the long-run growth rate of GDP will decrease.

Using the Harrod-Domar Growth Model,suppose the Saving Rate for an Economy