What is meant by the golden rule level of capital? Explain what condition on the MPK...

What is meant by the golden rule level of capital? Explain what condition on the MPK is required if we are to have the golden rule. Explain why this condition is necessary. Finally, true or false: over time, the Solow model predicts that the capital stock approaches the golden-rule level.

Expert Solution

1.) The term golden rule of Capital was used for the first time by Edmund Phelps

*The value of Capital which maximises consumption per worker is called golden rule level of Capital. In other words, it's the level of Capital at which study state consumption is the highest. Most countries have a level of Capital that is below the golden rule level.

* At the golden rule level, marginal product of Capital must be equal to the depreciation rate.

MPK = depreciation rate

* If the marginal product of Capital is not equal to depreciation, it means that of production function and depreciation line doesn't have the same slope. This shows that consumption is not at the highest possible level. If consumption isn't at the highest possible level, the golden rule of Capital won't hold.

* True

Solow has predicted that Capital accumulates over time and drprecuates at a constant, proportional rate. So capital will reach golden rule over time.

Rahul Sunny answered 2 years ago

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