Suppose the saving rate is initially less than the golden rule saving rate. We know with certainty that a decrease in the saving rate will cause:
A) a decrease in consumption per worker.
B) a decrease in output per worker.
C) a decrease in the capital- labour ratio.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

According to the Solow growth model, the economy will eventually approach the steady state where output per worker and consumption per worker are maximized. However, if the saving rate is initially lower than the golden rule saving rate, the economy will be below the steady state level of capital per worker. Therefore, a decrease in the saving rate will decrease the capital per worker, which will lead to a decrease in output per worker and consumption per worker.

Suppose the Saving Rate Is Initially Less Than the Golden