Refer to the following figure when answering
Figure 5.4: Solow Diagram
-Consider the Solow model exhibited in Figure 5.4.
Which of the following is/are true?
i. For any single country, the movement from point a to b is due to an increase in the saving rate, s₁ > s₂.
ii. For any single country, the movement from point c to b is due to an increase in capital stock for the saving rate, s₂.
iii. If s₁ and s₂ stands for the saving rates in Countries 1 and 2, respectively, Country 2 has a lower saving rate.

Question

Refer to the following figure when answering
Figure 5.4: Solow Diagram

-Consider the Solow model exhibited in Figure 5.4.
Which of the following is/are true?
i. For any single country, the movement from point a to b is due to an increase in the saving rate, s₁ > s₂.
ii. For any single country, the movement from point c to b is due to an increase in capital stock for the saving rate, s₂.
iii. If s₁ and s₂ stands for the saving rates in Countries 1 and 2, respectively, Country 2 has a lower saving rate.

Quizplus · Accepted Answer

For the movement from point a to b, we can see that the increase in the saving rate causes an increase in the steady-state capital stock, leading to a higher level of output per worker. Therefore, statement i is true. For the movement from point c to b, we can see that an increase in the capital stock at a given saving rate causes an increase in output per worker, leading to a movement along the production function to a higher steady state. Therefore, statement ii is also true. However, we cannot determine the relative saving rates of the two countries from the given diagram, so statement iii is false. Thus, the correct answer is D.

Refer to the Following Figure When Answering