Suppose the economy is initially in the steady state. A decrease in the depreciation rate (6) will cause:
A) a decrease in Y/N.
B) a decrease in C/N.
C) an increase in K/N.
D) an increase in the growth rate in the long run.
E) a decrease in the saving rate.

Question

Quizplus · Accepted Answer

A decrease in the depreciation rate will increase the effective capital stock, leading to an increase in the capital stock per worker and an increase in K/N. This will lead to an increase in output per worker and an increase in the steady state level of output. However, it will not affect consumption or saving rates, and the growth rate in the long run will remain unchanged as technology and labor force growth rates are not affected.

Suppose the Economy Is Initially in the Steady State