In the Solow model, saving and investing in additional factories and computers does ________ if the economy is below Y*. But, in the long run, the ________ accumulation lead the return to these investments to fall.
A) lead output to grow in the medium run; diminishing returns to capital
B) lead output to grow in the long run; increasing returns to capital
C) lead output to grow in the medium run; increasing returns to capital
D) not lead output to grow in the medium run; diminishing returns to capital
E) not lead output to grow in the long run; increasing returns to capital

Question

Quizplus · Accepted Answer

In the Solow model, saving and investing in additional capital like factories and computers leads output to grow in the medium run if the economy is below its steady state (Y*). However, due to diminishing returns to capital, the return on these investments decreases in the long run.

In the Solow Model, Saving and Investing in Additional Factories