How would you best describe the golden rule of capital accumulation? Select one – the most appropriate answer given provisions of Solow model of economic growth.

Question

BlackTom AI · Accepted Answer

The prompt asks to describe the golden rule of capital accumulation within the Solow growth framework and to select the most appropriate option.
Since the answer options are not provided in the list (the only presented statement is: 'There is a particular level of steady state capital per person at which consumers get the maximum quantity of consumption per person.'), I will analyze this given statement in the context of the Solow model.
In the Solow model, the long-run steady state level of capital per person, k*, is determined by the balance between investment and depreciation plus population growth and technological progress. The golden rule is a specific condition where the steady-state level of capital per person is chosen so that per-capita consumption, c*, is maximized. This occurs when the saving rate drives k to the level k_g where the marginal product of capital minus depreciation and population/tech growth yields the highest c*; equivalently, k_g satisfies f'(k_g) = δ + n + g, i.e., the net return to capital equals the required depreciation and dilution rate.

Option evaluation:
- The statement asserts that there exists a particular steady-state capital-per-person level at which consumption per person is maximized. This aligns with the golden-rule idea: among all steady states achievable by varying the saving behavior (or the steady-state k), there is a specific k where c* is maximized. The key feature of the golden rule is exactly this: choose k* so that the marginal product of capital after accounting for depreciation and dilution yields maximum sustainable consumption. Therefore, conceptually, the statement captures the essence of the golden rule.
- If one were to compare to any alternative options (which are not provided here), a true golden-rule statement would emphasize maximizing steady-state consumption, not merely any higher or lower level of k; it would also acknowledge the distinction between the standard steady state (not optimizing) and the golden-rule steady state (optimized consumption). A wrong option would misstate that any higher k* or any saving rate always increases long-run consumption, or that the golden rule ignores depreciation, population growth, or technological progress.

In summary, the provided statement correctly conveys the core idea of the golden rule: there is a specific steady-state level of capital per person that yields the maximum possible consumption per person in steady state within the Solow framework, assuming the conventional setup with depreciation and growth. If other options were present, they would need to be evaluated against whether they claim the same maximization of c*, or erroneously claim that all steady states or all saving rates lead to higher consumption without regard to the golden-rule condition.

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How would you best describe the golden rule of capital accumulation? Select one – the most appropriate answer given provisions of Solow model of economic growth.

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In the Solow model with no population growth (i.e., L is fixed), a rise in the saving rate leads to a higher steady-state capital stock, and a rise in the depreciation rate leads to a lower steady-state capital stock.

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