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Questions › DSE › DSE 2015 › Q54
2 marks, −0.666666666666667Economics of Growth and Development › Harrod–Domar and Solow growth models › Growth models with labour markets and class savingsHardabout 4 min

DSE 2015 Question 54: Harrod–Domar and Solow growth models

Solow model Y=KαL1−αY=K^{\alpha}L^{1-\alpha}Y=KαL1−α with class savings: households save sws_wsw​ of wage earnings and srs_rsr​ of interest earnings; labour grows at nnn, no depreciation. With sw=0s_w=0sw​=0 and sr=1s_r=1sr​=1, an increase in α\alphaα

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Solow model Y=K^αL^(1-α) with class savings: households save s_w of wage earnings and sᵣ of interest earnings; labour grows at n, no depreciation. With s_w=0 and sᵣ=1, an increase in α (A) unambiguously increases the long-run steady-state capital-labour ratio (B) unambiguously decreases it (C) increases it if α>n (D) leaves it unchanged

Also written as: Solow model Y=K^(alpha)L^(1-alpha) with class savings: households save s_w of wage earnings and s_r of interest earnings; labour grows at n, no depreciation. With s_w=0 and s_r=1, an increase in alpha

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

What this question tests

This question is on Growth models with labour markets and class savings, part of Harrod–Domar and Solow growth models in Economics of Growth and Development.

Extensions that add a labour market or let different groups save at different rates.

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Question from the DSE 2015 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.