Case Interview Prep

Category - Economics

According to the Solow-Swan model of economic growth, greater investment in physical capital raises the standards of living temporarily because of:
  1. crowding out effects
  2. demand pull inflation
  3. diminishing returns
  4. loanable funds
Explanation
Answer: C - Greater investment in physical capital raises the standards of living temporarily because of diminishing returns.

Key Takeaway: The Solow-Swan model of economic growth assumes that there are diminishing returns to physical investments. Diminishing returns refer to the ever decreasing output that accompanies increasing investment. For example, if a company increases the number of machines per production shift, the output may not correspond to the number of machines added.
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