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The image above depicts the Solow Growth Model. We can use this model to determine how the steady-state level of capital stock and output respond to different changes.

If the depreciation rate increases, what happens to the curve representing depreciation?
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      The image above depicts the Solow Growth Model. We can use this model to determine how the steady-state level of capital stock and output respond to different changes.

      If the depreciation rate increases causing the depreciation curve to become steeper, what happens to the steady-state levels of capital stock and output?
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          The image above depicts the Solow Growth Model. We can use this model to determine how the steady-state level of capital stock and output respond to different changes.

          What is the new steady-state level of capital stock and the new steady-state level of output if we increase the depreciation rate from 0.02 to 0.03?

          K* =

          Y* =

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          Correct! The steady-state level of capital stock will be 100 (where the new depreciation curve intersects the investment curve). At a level of capital stock equal to 100 output will be 10.
          At the steady-state level of capital stock, investment must be equal to depreciation (the curves must intersect). What is the capital stock at this intersection? What is the level of output at this level of capital?
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              Some people argue that if machines wear out faster (i.e. the depreciation rate increases) this will create more jobs in the manufacturing industries. Is this argument true or false given the predictions of the Solow model and should countries hope for higher depreciation rates to spur growth?
              This argument is not consistent with the predictions of the Solow model. You can see the labor that goes into replacing worn-out tools and machines, but you can’t always see what that labor could have produced if the tools and machines hadn’t worn out. Borrowing from the nineteenth century French economist Frederic Bastiat, we call this the “broken window fallacy.”
              While it may appear that more output is produced to repair or replace the worn out machines, might resources used in that case have gone to some other, more productive use? When resources are used to replace existing capital, those resources must be diverted from somewhere. How might that diversion impact output?

              Briefly explain your reasoning.
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