42. New capital is created in the economy by: consumption O Investment. deprecia

Question

42. New capital is created in the economy by: consumption O Investment. depreciation government 43. A small country' s aggregate production function is given by y-K1/2. Its depreciation rate is 5% and its investment rate is 25%, what is its steady-state level of capital, 0 25 1.25 0.25 44. According to the Solow model, countries with higher savings rates have higher levels of o output. both investment and output neither investment nor output. 45. What is key to growth for countries such as the United States and Japan? more physical capital investments investments in human capital larger institutions O new ideas

Explanation / Answer

42) New capital is created in the economy by investment as investment earn interest rate. The second option is correct.

43) In steady state k/y=saving rate/depreciation rate

k/k^0.5=0.25/0.05 (as investment=savings)

k^0.5=5

k=25

The first option is correct

44) In Solow model when saving rate increases, the amount of investment for any given capital stock is higher. Therefore it shifts the saving curve upward. The capital stock rises until it reaches new steady state. So the output is also increased. The third option is correct.

45) The country can grow with the invention of new technology. new ideas. As by these productivities is increased for both labor and capital. the third option is correct.

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