Question

Consider two Solow economies, A and B. Initially, these two economies are identical in terms of all their exogenous parameters, except their depreciation rate δ. What assumption is made about δa?

a. It is increasing in economy A
b. It is decreasing in economy A
c. It remains constant in economy A
d. It is irrelevant in economy A

Answer 1

In the context of the Solow growth model, it is typically assumed that the depreciation rate in an economy remains constant. Hence, δa in Economy A is presumed to be constant.

Step-by-step explanation:

The question concerns two Solow economies, A and B, which are identical except for their depreciation rates (δ). Regarding economy A, the assumption made about its depreciation rate (δa) is not directly provided in the question. However, typically in a Solow model, the depreciation rate is assumed to be constant. Therefore, the correct answer would be that δa remains constant in economy A (option c).