Q: What is the Solow model?
A: A model that explains long-term economic growth through capital accumulation and technological progress.
Q: What is the basic production function in the Solow model?
A: Y = A · F(K, N) Where Y = output, A = technology, K = capital, N = labor.
Q: What does diminishing returns to capital mean?
A: As capital increases, each additional unit adds less to output if labor is fixed.
Q: What is the steady state in the Solow model?
A: The point where capital per worker and output per worker remain constant over time.
Q: What happens if the savings rate increases?
A: More investment → capital increases → higher output → new steady state with higher k* and y*
Q: Can capital accumulation cause permanent growth?
A: ❌ No. Due to diminishing returns, it leads to temporary growth only.
Q: What is needed for long-run (sustainable) growth in the Solow model?
A: Technological progress (↑A) – it shifts the production function upward.
Q: What is the Golden Rule level of capital?
A: The level of capital that maximizes steady-state consumption per worker.
Q: What happens if a country saves too much?
A: Output rises, but consumption may fall → overaccumulation → not optimal (Golden Rule not met)
Q: What is the key limitation of the Solow model?
A: Technological progress is exogenous – it is assumed, not explained.
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