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In the Harrod-Domar model, which scenario correctly characterises the instability (knife-edge) principle?

Q: Answer-In the Harrod-Domar model, which scenario correctly characterises the instability (knife-edge) princ...

If G Gw demand exceeded expectations inventories deplete entrepreneurs increase investment income and demand rise further G diverges even further above Gw. The system is inherently UNSTABLE self-reinforcing deviation. This is the knife-edge. C describes the OPPOSITE incorrect adjustment direction. D describes a Solovian fix that Harrod-Domar explicitly lacks saving rate is fixed exogenously.

A If G > Gw, entrepreneurs find inventories depleting — they increase investment, pushing G further above Gw — a self-reinforcing boom; if G < Gw, the reverse — a self-reinforcing recession

B If Gw > Gn, the economy automatically adjusts through flexible factor prices until G = Gw = Gn

C If G > Gw, excess capacity builds up, discouraging investment and pulling G back toward Gw — the model is self-stabilising

D The knife-edge problem disappears in the long run because the saving rate s adjusts to close the gap between Gw and Gn

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In the Harrod-Domar model, which scenario correctly characterises the instability (knife-edge) principle?

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