Suppose the growth rate of technology, [tex]g_A[/tex], increases in a country from 4% per annum to 6% per annum. How does this change the steady-state?

A. [tex]k[/tex], where [tex]k[/tex] is capital per effective worker, increases
B. [tex]k[/tex], where [tex]k[/tex] is capital per effective worker, decreases
C. [tex]y[/tex], where [tex]y[/tex] is output per effective worker, decreases
D. [tex]y[/tex], where [tex]y[/tex] is output per effective worker, increases
E. Output per worker increases
F. Capital per worker increases

An increase in technology growth rates results in increased values of both capital and output per effective worker. The economy achieves a higher production level, leading to a significant increase in GDP per capita.

Explanation:

When the growth rate of technology, gA, increases from 4% per annum to 6% per annum in a country, it will affect the steady state in several ways. Increased technological rates increase both capital and output per effective worker, denoted by k and y respectively. In the long run, the steady state value of k, capital per effective worker, increases.

This is often referred to as capital deepening. Similarly, an increase in technology growth rates leads to an enhancement in the steady state value of y, output per effective worker. This means that output per worker also increases due to higher productivity from the improved technology. Therefore, capital per worker also increases.

Put simply, the economy moves to a higher aggregate production level due to the combined effects of technological advancement and capital deepening. This ultimately leads to a significant increase in GDP per capita, demonstrating the critical impact of seemingly small changes in technology growth rates on the overall economy.

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