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Questions › DSE › DSE 2011 › Q58
2 marksEconomics of Growth and Development › Harrod–Domar and Solow growth models › The golden ruleHardabout 4 min

DSE 2011 Question 58: Harrod–Domar and Solow growth models

Setup, from Q55 of the paper:

Consider an economy with aggregate production Yt=A(Kt)α(Lt)1−αY_{t}=A(K_{t})^{\alpha}(L_{t})^{1-\alpha}Yt​=A(Kt​)α(Lt​)1−α, A>0A>0A>0, 0<α<10<\alpha<10<α<1, both factors fully employed. A constant fraction sss of output is saved and invested, augmenting next period's capital; there is no depreciation. Labour grows at constant rate nnn. Let A=20A=20A=20, α=12\alpha=\tfrac{1}{2}α=21​, s=14s=\tfrac{1}{4}s=41​, n=110n=\tfrac{1}{10}n=101​. The steady state level of output per worker is

(Same Solow economy.) The golden rule level of consumption per worker is

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Plain-text version

Setup, from Q55 of the paper: Consider an economy with aggregate production Yₜ=A(Kₜ)^α(Lₜ)^(1-α), A>0, 0<α<1, both factors fully employed. A constant fraction s of output is saved and invested, augmenting next period's capital; there is no depreciation. Labour grows at constant rate n. Let A=20, α=1/2, s=1/4, n=1/10. The steady state level of output per worker is (Same Solow economy.) The golden rule level of consumption per worker is (A) 500 (B) 1000 (C) 250 (D) 25

Also written as: Setup, from Q55 of the paper: Consider an economy with aggregate production Y_t=A(K_t)^(alpha)(L_t)^(1-alpha), A>0, 0<alpha<1, both factors fully employed. A constant fraction s of output is saved and invested, augmenting next period's capital; there is no depreciation. Labour grows at constant rate n. Let A=20, alpha=1/2, s=1/4, n=1/10. The steady state level of output per worker is (Same Solow economy.) The golden rule level of consumption per worker is

Harrod–Domar and Solow growth models has come up 113 times in 7 exams since 2006.

What this question tests

This question is on The golden rule, part of Harrod–Domar and Solow growth models in Economics of Growth and Development.

The saving rate that maximises consumption per worker in the steady state.

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Question from the DSE 2011 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.