Suppose the economy is operating at the steady state. Which of the following is true given this information?
A) Steady state saving is more than total consumption.
B) Steady state saving is just sufficient to cover depreciation.
C) Steady state saving exceeds depreciation each year by a constant amount.
D) Steady state saving equals consumption.
E) Steady state saving is less than total consumption.

Question

Quizplus · Accepted Answer

In steady state, the economy is in a long-run equilibrium where output, consumption, investment, and capital stock remain constant over time. In this situation, steady state saving is just sufficient to cover depreciation because investment equals depreciation in the steady state, and any excess saving would lead to an increase in the capital stock, which would eventually lead to diminishing returns and a decrease in output. Therefore, option B is the correct answer. Options A, C, D, and E are incorrect as they do not accurately reflect the nature of the steady state.

Suppose the Economy Is Operating at the Steady State