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Questions › DSE › DSE 2015 › Q57
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 57: Harrod–Domar and Solow growth models

Now the government taxes wage earnings at rate τ\tauτ and transfers the revenue to capital-owners; households save sws_wsw​ of net wages and srs_rsr​ of net (post-transfer) interest, with sw<srs_w<s_rsw​<sr​. In the new equilibrium, an increase in τ\tauτ

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Now the government taxes wage earnings at rate τ and transfers the revenue to capital-owners; households save s_w of net wages and sᵣ of net (post-transfer) interest, with s_w<sᵣ. In the new equilibrium, an increase in τ (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: Now the government taxes wage earnings at rate tau and transfers the revenue to capital-owners; households save s_w of net wages and s_r of net (post-transfer) interest, with s_w<s_r. In the new equilibrium, an increase in tau

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.