In the Solow model,an increase in investment leads to:
A) an increase in growth rates in the short run but a return to zero growth in the long run as the economy converges to a new,higher steady state.
B) an increase in growth rates in both the short run and the long run,as new investment will lead to permanently higher levels of the capital stock.
C) a decrease in growth rates in both the short run and the long run,as fewer resources are available for production following the increase in investment.
D) no change in growth rates.

Question

Quizplus · Accepted Answer

In the Solow model, an increase in investment leads to a temporary increase in growth rates as the economy accumulates more capital and moves towards a new, higher steady state. However, in the long run, the growth rate returns to its original level (often zero in simple models) as the effects of diminishing returns set in and the economy stabilizes at the new steady state.

In the Solow Model,an Increase in Investment Leads To