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Questions › IIT JAM › IIT JAM 2021 › Q12
2 marks, −0.667Economics of Growth and Development › Harrod–Domar and Solow growth models › Comparative statics in the Solow modelModerateabout 2 min

IIT JAM 2021 Question 12: Harrod–Domar and Solow growth models

In a Solow model without technological progress, Yt=KtαNt1−αY_t = K_t^{\alpha} N_t^{1-\alpha}Yt​=Ktα​Nt1−α​, population grows at gN>0g_N > 0gN​>0, saving rate s∈(0,1)s \in (0,1)s∈(0,1), depreciation δ≥0\delta \ge 0δ≥0, and kt=Kt/Ntk_t = K_t/N_tkt​=Kt​/Nt​. If the population growth rate rises exogenously to gN′g_N'gN′​, at the new steady state aggregate output grows at a rate

Tap an option to check your answer.

Answer and worked solution

Answer: (B)

In the Solow model without technical progress, per-capita capital and per-capita output are constant in the steady state.

Aggregate output therefore grows at the population growth rate. After the rise to gN′g_N'gN′​, the new steady-state growth rate of aggregate output is gN′g_N'gN′​, option (B).

The trap: (D) (1−α)gN′(1-\alpha)g_N'(1−α)gN′​

The exponent (1−α)(1-\alpha)(1−α) scales the transitional dynamics, not the steady-state growth of aggregate output, which simply tracks the population growth rate.

Plain-text version

In a Solow model without technological progress, Yₜ = Kₜ^α Nₜ^(1-α), population grows at g_N > 0, saving rate s ∈ (0,1), depreciation δ ≥ 0, and kₜ = Kₜ/Nₜ. If the population growth rate rises exogenously to g_N′, at the new steady state aggregate output grows at a rate (A) g_N (B) g_N′ (C) (1-α)g_N (D) (1-α)g_N′

Also written as: In a Solow model without technological progress, Y_t = K_t^(alpha) N_t^(1-alpha), population grows at g_N > 0, saving rate s in (0,1), depreciation delta >= 0, and k_t = K_t/N_t. If the population growth rate rises exogenously to g_N', at the new steady state aggregate output grows at a rate

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

What this question tests

This question is on Comparative statics in the Solow model, part of Harrod–Domar and Solow growth models in Economics of Growth and Development.

How steady states change with population growth, technology and depreciation.

TestStop has 8 past-paper questions on this subtopic.

Take this paper as a timed mockMore on Comparative statics in the Solow model

Question from the IIT JAM 2021 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.