Economics

Correct Answer: Government spending on infrastructure

Government spending on infrastructure is not a major determinant of economic growth in the Solow growth model. The Solow growth model focuses on the factors that contribute to long-term economic growth, such as the rate of technological progress and innovation, and the growth rate of the labor force and human capital accumulation. While government spending on infrastructure can certainly have a positive impact on economic growth, it is not considered a fundamental driver of long-term growth in the context of the Solow model. The other two answers, the rate of technological progress and innovation, and the growth rate of the labor force and human capital accumulation, are indeed key determinants of economic growth according to the Solow model.

Correct Answer: Investments in research and development

Investments in research and development are most likely to increase the rate of technological progress. R&D leads to new innovations, processes, and technologies that can boost productivity and economic growth. Implementing protectionist trade policies would likely hinder technological progress by reducing competition and the diffusion of ideas and technologies across borders. Focusing solely on increasing physical capital without proportional investments in human capital would limit the ability to develop and utilize new technologies effectively.

Correct Answer: The central bank should gradually raise interest rates to prevent the economy from overheating and to keep inflation under control, while being cautious not to raise rates too quickly and risk slowing economic growth.

The most appropriate policy response for the central bank in this situation is to gradually raise interest rates. This will help prevent the economy from overheating and keep inflation under control, while being cautious not to raise rates too quickly and risk slowing economic growth. Significantly lowering interest rates to further stimulate growth would be unwise, as it risks much higher inflation in an economy that is already growing rapidly. The booming technology sector and supportive government policies are already providing a strong stimulus, so additional monetary easing is unnecessary and potentially destabilizing. Maintaining rates at their current level and taking a wait-and-see approach is also not optimal, as the central bank needs to be proactive in managing the risk of rising inflation expectations as growth accelerates. Gradual rate hikes will help anchor inflation expectations and promote more sustainable growth.