Economic growth a. According to the Solow model of economic growth, what determines the growth rate of...

Economic growth

a. According to the Solow model of economic growth, what determines the growth rate of real income per person in the very long run (steady state)? Explain.

b. What public policies have been proposed to increase the rate of economic growth? Explain.

Expert Solution

a.

If the economy is a competitive market economy, the real
interest rate is the marginal product of capital; and the real
income per person is the marginal product of labor.
Since the capital/labor is constant in the long-run steady state,
the marginal products of capital and labor are constant. Hence
the real interest rate and the real income per person are constant.

b.

Public policies have been proposed to increase economic growth,focused on trying to increase aggregate demand or increase aggregate supply ,are mentioned below:

Demand side policies:
Fiscal policy related to taxes and government spending,
Monetary policy related to interest rates
Supply side policies:
Privatisation, liberalisation,globalization, education and training, improved infrastructure.
Demand side policies are useful during a recession or period of economic stagnation and supply side policies are used for improving the long run growth in productivity.

Rahul Sunny answered 8 months ago

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