Question
In the Harrod-Domar Model, if the savings rate (s) is 25% and the capital-output ratio (v) is 5, what is the warranted growth rate of the economy?
Solution
According to the Harrod-Domar growth model, the rate of economic growth is directly proportional to the savings rate and inversely proportional to the capital-output ratio. The formula is g = s / v. By substituting the given values: g = 25 / 5 = 5. Therefore, the economy will grow at a rate of 5%. This reflects the idea that higher savings lead to more investment, but the efficiency of that investment (determined by the capital-output ratio) dictates the final growth output.
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