In the Solow model in which y=Akα (where y is GDP per worker and k is capital per worker), compare the poverty trap model to the incentives model. Discuss whether the following statements are true or false in each model, using graphs and equations to explain and prove your conclusions: a. There exists some level of aid sufficient to get any poor country out of poverty b. There exists some threshold above which aid can be discontinued. c. A country’s long-run per capita income depends on where its per capita income is now.
In the Solow model in which y=Akα (where y is
a. There exists some level of aid sufficient to get any poor country out of poverty
b. There exists some threshold above which aid can be discontinued.
c. A country’s long-run per capita income depends on where its per capita income is now.
d. When the country is open to capital flows in or out, the main determinant of development is government policies and institutions
e. Two pieces of evidence support the existence of poverty traps: (1) Growth of poor countries is slower than that of richer countries, and (2) Growth accelerates when a poor country exits poverty (explain why the poverty trap model predicts (1) and (2) and whether these predictions are confirmed by the data).
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