We appreciate your visit to 1 3 points Suppose the depreciation rate of capital decreases in a permanent manner Use the Solow growth model to explain the impacts of this. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!
Answer :
Final answer:
In the Solow growth model, when the depreciation rate of capital decreases, it results in short-term gains in capital per worker, output per worker, and consumption per worker. Option A is correct.
Explanation:
Using the Solow growth model, a decrease in the depreciation rate of capital means that a larger amount of existing capital stock per worker is preserved each period. In the short run, this results in an influx of saved capital, referred to as capital deepening, which can lead to increases in capital per worker, output per worker and consumption per worker, as fewer resources are dedicated to replacing depreciated capital.
In the long run, however, the economy reaches a new steady-state equilibrium with a higher level of capital per worker, but the growth rates of output per worker and consumption per worker return to their original levels. This is a result of the diminishing marginal productivity of capital as firms adjust their level of capital stock to the reduced depreciation rate. It's important to emphasize that while the absolute levels of capital per worker, output per worker, and consumption per worker are higher, their growth rates remain the same in a steady-state equilibrium.
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