-(Figure: The Solow Model)If the production function shifts from Y₁ to Y₂ in the accompanying graph of the Solow model,then: A) the steady state will remain at K₁. B) a new steady state will occur at K₂. C) the steady state will move to K₂ and then return to K₁ in the long run. D) a new steady state will occur somewhere between K₁ and K₂.

Question

Quizplus · Accepted Answer

A shift in the production function in the Solow model represents a change in technology or productivity. This shift leads to a new steady state at a different level of capital per worker, hence option B is correct.

-(Figure: the Solow Model)If the Production Function Shifts from Y1

-(Figure: the Solow Model)If the Production Function Shifts from Y₁