The underlying assumption of the Harrod-Domar growth model is that
A)the incremental capital-output ratio is given b₌y Y/K.
B)growth is mainly determined by capital accumulation.
C)growth can be sustained only if agricultural productivity rises.
D) developing countries save too much and invest too little.

Question

Quizplus · Accepted Answer

The Harrod-Domar growth model assumes that the rate of economic growth is primarily determined by the level of capital accumulation in the economy. The model proposes that an increase in investment (i.e. capital) will lead to a corresponding increase in output (i.e. income), but that this relationship is subject to diminishing returns. The model also assumes a fixed incremental capital-output ratio (i.e. the amount of capital required to produce an additional unit of output) in the short run, but allows for technological progress to lower the ratio in the long run. Therefore, the best choice is B.

The Underlying Assumption of the Harrod-Domar Growth Model Is That