In the Solow Model, If a Country's Saving Rate $\gamma$ ) Increased from 10% to 12% and It Was Operating

question 10

Multiple Choice

In the Solow model, if a country's saving rate ( $\gamma$ ) increased from 10% to 12% and it was operating at its steady state before the change, we would expect to see:

• A) a decrease in both the capital stock and output.
• B) an increase in the capital stock only.
• C) an increase in output only.
• D) an increase in both the capital stock and output.

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Definitions:

Capacity Level

The maximum output a company can produce and sell with its current resources.

Maximum Growth Rate

The highest possible rate at which a company can expand its operations using only internal financing sources, without resorting to borrowing or issuing new equity.

Debt-equity Ratio

A metric that measures a company's financial leverage, calculated by dividing a company’s total liabilities by its shareholder equity.

Retention Ratio

The proportion of net income that is retained by a company rather than distributed to shareholders as dividends.