In the Solow growth model with population growth, but no technological progress, if in the steady state the marginal product of capital equals 0.10, the depreciation rate equals 0.05, and the rate of population growth equals 0.03, then the capital per worker ratio ____ the Golden Rule level.

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Quizplus · Accepted Answer

The Golden Rule level of capital per worker is where the economy has the highest consumption per worker level in the long run. In the Solow model, this occurs where the marginal product of capital equals the sum of the depreciation rate and the rate of population growth. Therefore, in this scenario, the Golden Rule level of capital per worker is 0.05 + 0.03 = 0.08. Since the marginal product of capital is 0.10, the economy has too much capital per worker in the steady state, which means it is above the Golden Rule level. Therefore, the answer is B, below. The economy will move towards the Golden Rule level, where consumption per worker will be maximized.

In the Solow Growth Model with Population Growth, but No