High School

Which of the following statements describe what is meant by a steady state in terms of the Solow model? (Assume there is no productivity growth.)

I. Output per worker = consumption per worker = capital per worker
II. Output per worker, consumption per worker, and capital per worker are constant.
III. Output per worker, consumption per worker, and capital per worker all grow at the same positive rate.
IV. Total output, total consumption, and total capital all grow at the same rate (the growth of the labor force).

A. I only
B. II and IV
C. I and IV
D. II and III
E. II, III, and IV - All of the above statements describe the steady state as given by the Solow model.

Answer :

Final answer:

A steady state in the Solow model is when output per worker, consumption per worker, and capital per worker are constant, and total quantities grow at the rate of the labor force. The correct statements describing a steady state are II and IV. As such, the correct answer is B (II and IV).

Explanation:

The concept of steady state in the context of the Solow model is represented by a situation where there is no change in the ratios of main economic indicators per worker over time, under the assumption of no productivity growth. In such a steady state:

  • The amount of output per worker, consumption per worker, and capital per worker do not change, i.e., they are constant.
  • Total output, total consumption, and total capital grow at the rate of growth of the labor force.

Therefore, the correct answer to the question of which statements describe what is meant by a steady state in terms of the Solow model would be II (Output per worker, consumption per worker, and capital per worker are constant) and IV (Total output, total consumption, and total capital all grow at the same rate, the growth of the labor force).

Statement I is incorrect because it equates all three variables, which is not a requirement for the steady state as defined. Statement III is not accurate as it suggests that in a steady state, there is growth, which contradicts the concept of a steady state without productivity growth. As such, the correct answer is B (II and IV).