Suppose an economy experiences a decrease in the saving rate. As the economy adjusts to this, we would expect output per worker:
A) to decrease at a permanently higher rate.
B) to decrease at a high rate temporarily and the rate of decrease goes to zero in the steady state.
C) to decrease slower at the beginning, then faster, and then at a constant rate in the steady state.
D) to decrease at a constant rate and continue increasing at that rate in the steady state.
E) to first increase, then decrease at an increasing rate, then increase at a constant rate in the steady state.

Question

Quizplus · Accepted Answer

A decrease in the saving rate leads to a decrease in the capital stock, and hence a decrease in output per worker. Initially, the rate of decrease may be high as the economy adjusts, but over time it will converge to zero in the steady state. This is because in the long run, the capital stock will adjust to its new lower level, and output per worker will be determined by the production function and the new level of capital.

Suppose an Economy Experiences a Decrease in the Saving Rate