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Questions › DSE › DSE 2018 › Q41
4 marks, −1Economics of Growth and Development › Harrod–Domar and Solow growth models › The golden ruleModerateabout 2 min

DSE 2018 Question 41: Harrod–Domar and Solow growth models

Consider the Solovian economy with Yt=Kt1/2Nt1/2Y_t = K_t^{1/2} N_t^{1/2}Yt​=Kt1/2​Nt1/2​, population 100100100 (no growth), and 100%100\%100% depreciation within one period. Suppose households were free to choose their saving rate. If they wanted to maximise the steady-state level of aggregate consumption, the saving rate they would choose is

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Consider the Solovian economy with Yₜ = Kₜ^(1/2) Nₜ^(1/2), population 100 (no growth), and 100% depreciation within one period. Suppose households were free to choose their saving rate. If they wanted to maximise the steady-state level of aggregate consumption, the saving rate they would choose is (A) 1/2 (B) 1/5 (C) 1/4 (D) 1/10

Also written as: Consider the Solovian economy with Y_t = K_t^(1/2) N_t^(1/2), population 100 (no growth), and 100% depreciation within one period. Suppose households were free to choose their saving rate. If they wanted to maximise the steady-state level of aggregate consumption, the saving rate they would choose 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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Practise Harrod–Domar and Solow growth modelsMore on The golden rule

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Question from the DSE 2018 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.