Suppose a poor economy inches towards the steady state in Solow's exogenous growth model. What happens?

Question

Quizplus · Accepted Answer

In Solow's exogenous growth model, the steady state occurs when the rate of saving equals the rate of depreciation, and there is no further growth in output per capita. Therefore, if a poor economy is inching towards the steady state, it means that the growth rate of output is decreasing. Option A is incorrect because consumption per capita may remain constant or increase slightly due to technological progress. Option B is also incorrect because it is the rate of saving that determines the level of capital stock and output per capita in the long run, not the other way around. Option C is not necessarily true because the depreciation rate is assumed to be constant in the Solow model.

Suppose a Poor Economy Inches Towards the Steady State in Solow's