Consider the Solow growth model with concave production function as studied in class. Suppose the economy is initially in the picture below, and currently has the level of capital stock of K0. What would happen to the dynamics of capital accumulations when depreciation rate increases? Graphically denote the direction and the speed of change/accumulation/decumulation of the capital stock, then verbally explain why they move like so.
Consider the Solow growth model with concave production function as studied in class. Suppose the economy is initially in the picture below, and currently has the level of capital stock of K0. What would happen to the dynamics of capital accumulations when depreciation rate increases? Graphically denote the direction and the speed of change/accumulation/decumulation of the capital stock, then verbally explain why they move like so.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider the Solow growth model with concave production function as studied in class. Suppose
the economy is initially in the picture below, and currently has the level of capital stock of K0. What would
happen to the dynamics of capital accumulations when
direction and the speed of change/accumulation/decumulation of the capital stock, then verbally explain why
they move like so.
Transcribed Image Text:The diagram illustrates the relationship between Depreciation, Investment, and Capital Stock. It features two depreciation curves labeled "Old Depreciation" and "New Depreciation," along with an "Investment" curve.
**Axes:**
- The vertical axis represents Depreciation and Investment.
- The horizontal axis represents Capital Stock.
**Curves Details:**
1. **Old Depreciation Curve:**
- This curve starts from the origin and rises with a gentle slope, signifying the rate of depreciation associated with the existing level of capital stock.
2. **New Depreciation Curve:**
- This line also originates from the origin but has a steeper slope compared to the old depreciation curve, indicating an increased rate of depreciation.
3. **Investment Curve:**
- This curve begins at the origin and follows a concave upward trajectory, demonstrating the relationship between investment levels and capital stock.
**Intersection:**
- The "Investment" curve intersects both the "Old Depreciation" and "New Depreciation" curves. The intersection indicates the equilibrium level of capital stock, where depreciation equals investment.
**Vertical Line:**
- A dashed vertical line at \( K_0 \) denotes a specific level of capital stock that corresponds to the equilibrium point on the "Investment" and "Old Depreciation" curves.
This diagram is useful for visualizing how changes in depreciation rates can affect the equilibrium level of capital stock in an economy.
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