Answer to Question #193197 in Macroeconomics for Diya

Question

Q) In the Solow growth model, assume all the standard assumptions hold, except that now population is constant (𝑛 = 0) and the depreciation rate 𝑑 is equal to zero. Which is true?

a) There are two steady states

b) Capital and capital per worker grow at the same rate

c) In the steady state, investment is equal to the depreciation rate

d) Aggregate savings are larger than aggregate investment

e) If we start with an initial capital larger than zero, the living standards will keep growing forever

Answer 1

The correct option is:

e) If we start with an initial capital larger than zero, the living standards will keep growing forever

Explanation

Having the population as constant (N=0) and the depreciation rate d is equal to zero

If initial capita k(0)>0

Then for steady state we need 

Sf(k) = (n+δ) k

But n = δ = 0

and S>0  f(k)>0

Therefore we can conclude that no steady state exists and if we start with an initial capital larger than zero the economy will keep growing forever.

Thus option e is the correct option.