Rutgers Introduction To Macroeconomics Practice Test

In the Solow framework, long-run growth comes from three forces that expand what the economy can produce: more physical capital, a larger labor force, and improvements in technology that raise overall productivity. Building up physical capital increases the stock of capital available for production, raising output. But because capital has diminishing returns, simply piling on more capital doesn’t sustain growth forever without other factors. A growing labor force adds more workers, which raises total output as the economy can employ more people. Per-capita growth, however, depends on how efficiently those workers combine with capital, which brings us to technology. Technological progress—total factor productivity—shifts the production function outward, meaning the same amounts of capital and labor produce more output. This is the key to sustained long-run growth in per-capita terms, because it raises the efficiency with which both capital and labor are used. The other options don’t capture the model’s mechanism: policy tools like government spending or money supply don’t by themselves drive long-run growth in the Solow model; inflation and unemployment are not the drivers of long-run output growth here; and focusing only on capital per worker ignores the roles of labor and technology.