Suppose an economy experiences an increase in the saving rate. We know with certainty that this increase in the saving rate will:
A) increase steady state consumption only if the new saving rate is less than the golden rule rate.
B) decrease steady state consumption only if the new saving rate is less than the golden rule rate.
C) have no effect on steady state consumption.
D) increase steady state consumption.
E) decrease steady state consumption.

Question

Quizplus · Accepted Answer

An increase in the saving rate will increase steady state consumption only if the new saving rate is less than the golden rule rate of saving, which maximizes steady state consumption per worker. If the saving rate is below this optimal level, increasing it can lead to higher investment, more capital accumulation, and thus higher consumption in the long run.

Suppose an Economy Experiences an Increase in the Saving Rate