Question

A. Consider the Solow growth model with population growth and technological progress. The economy is initially in a steady state. There is then a permanent reduction in the rate of technological progress.

A. True
B. False

B. The long-run growth rate of output per worker falls.
C. The long-run growth rate of output per effective worker falls.
D. The long-run level of output per effective worker rises.
E. The long-run level of output (i.e. aggregate output) will be lower than it would have been.
F. For the first decade or so, the growth rate of output per worker will be lower than it will be in the long run.

Answer 1

A permanent reduction in the rate of technological progress in the Solow growth model will lead to a decrease in the long-run growth rate of output per worker and per effective worker, a potentially lower long-run level of output per effective worker, and a lower long-run level of aggregate output.

Step-by-step explanation:

In the context of the Solow growth model, a permanent reduction in the rate of technological progress will have several long-term effects on economic growth. First, the long-run growth rate of output per worker will fall because technological progress is a key driver of increases in output per worker. Second, the long-run growth rate of output per effective worker will also fall, as the quality-adjusted labor input will grow more slowly. Third, this change does not necessarily mean that the long-run level of output per effective worker rises; instead, it may lead to a lower level than if technological progress had not slowed. Fourth, the long-run level of aggregate output will be lower than it would have been under a higher rate of technological progress. Finally, in the short term, or the first decade or so, the growth rate of output per worker will experience a decline until the new lower steady state growth rate is reached.