Assume a closed economy, perfectly elastic labor supply, and linear technology. Suppose the incremental capital-output ratio (ICOR) is 3, the depreciation rate is 3%, and the gross savings rate is 10%

Use the Harrod-Domar growth equation to determine the rate of growth. What would the gross savings rate have to be to achieve 5% growth? Assuming a perfectly elastic labor supply, state one criticism of this model from an exogenous growth theory viewpoint and another criticism of this model from an endogenous growth theory viewpoint.

This question may be asked later in the course or may be broken up into several questions. Whether to use it at this stage will depend on how much coverage you gave this topic in lecture, especially for the last part of the question and also whether the Harrod-Domar model was covered assuming a zero depreciation rate (as in the text) or a positive depreciation rate.