Question

Which of the following is not correct about the steady state equilibrium for the economy according to neoclassical growth theory?

• A. The growth rate of output is endogenously determined.
• B. The growth rate of output is equal to the population growth rate.
• C. The growth rate of output is independent of the saving rate.
• D. Per capita GDP and per capita capital are constant.

Hint:

In the neoclassical model, output growth in the steady state is driven by exogenous factors like population growth and technological progress.

Answer 1

The Correct Option is C

Step 1: Understanding steady state equilibrium in neoclassical growth theory.
In neoclassical growth theory, the steady state is a long-run equilibrium where the economy's output grows at a constant rate, determined by the rate of technological progress and population growth.

Step 2: Analysis of options.
- (A) The growth rate of output is endogenously determined: This is incorrect. In neoclassical growth theory, output growth is determined by exogenous factors like technological progress and population growth, not by internal factors like the saving rate.
- (B) The growth rate of output is equal to the population growth rate: This is correct. In the steady state, output growth equals population growth, as per the neoclassical model.
- (C) The growth rate of output is independent of the saving rate: This is incorrect. While the saving rate affects the level of capital in the economy, the long-run growth rate of output is independent of the saving rate in the neoclassical model.
- (D) Per capita GDP and per capita capital are constant: This is correct. In the steady state, per capita variables like GDP and capital remain constant as the economy grows at the same rate as the population.

Step 3: Conclusion.
The incorrect statement is (C), as the growth rate of output is independent of the saving rate in the steady state.