Question

Which of the following is true about the Solow Growth Model?

a. In the Solow Growth model consumption per person always rises as k rises

b. At a steady state the economy keeps growing with aggregate K, Y, C for example all rising over time

c. At steady state the following condition must always hold at k*: sy=(n+d)k

d. When the economy is below steady-state level of capital-per-worker then savings per worker is higher than breakeven investment

e. Golden rule level of capital-per-worker is where output-per-worker is maximized

Answer 1

Option C is correct. This is because at steady state ∆k = 0, i.e., investment = depreciation. This gives sy or sf(k) = (d+n)k [ R.H.S becomes (d+n+g) when technology is introduced].

Option A is not correct as consumption can initially fall with rise in k. Option B is incorrect since not all aggregates keep growing. Option D is incorrect since it's the opposite. Lastly, option E is incorrect since it is consumption per worker and not output per worker that is maximized