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    Question

    In the context of development economics, a persistent

    condition known as the poverty trap is often modeled as a stable equilibrium at a low level of income. This is characterized by:
    A A savings rate that is consistently greater than the required investment rate for any level of income. Correct Answer Incorrect Answer
    B A non-linear relationship where the income generated by investment is too low to offset depreciation and population growth at low-income levels. Correct Answer Incorrect Answer
    C A low-income level that is perfectly stable due to the assumption of a Cobb-Douglas production function. Correct Answer Incorrect Answer
    D A consumption function where marginal propensity to consume (MPC) is zero at all income levels below the poverty line. Correct Answer Incorrect Answer

    Solution

    Solution: The Poverty Trap is a state where poor countries struggle to invest enough to overcome capital depreciation and population growth, locking them in poverty. · The Mechanism: It relies on a non-linear function (often S-shaped or a low-level equilibrium trap). At low income levels, all income goes to survival (consumption), and the investment per worker (the product of savings/income and the low-income) is insufficient to counter the combined forces of capital depreciation and population growth. The required investment to escape the trap is high, making the low-income equilibrium stable. · This contrasts with the Solow model, which only features a single, stable steady state. Poverty trap models require a mechanism where the capital accumulation rate is low at low income levels, often due to high minimum consumption needs.

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