In the neoclassical growth model, if a nation's savings rate decreases, we should expect that
A)the long-run income per capita will increase
B)the long-run capital-labor ratio will increase
C)the growth rate of output will temporarily decrease but eventually return to its long-run trend
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

In the neoclassical growth model, a decrease in the savings rate leads to a decrease in investment and therefore a temporary decrease in the growth rate of output. However, eventually the capital-labor ratio will decrease, leading to an increase in the return to investment and a subsequent increase in investment and the long-run growth rate of output. Therefore, only option C is correct. A and B are incorrect as a decrease in savings will lead to a decrease in capital accumulation and therefore a decrease in long-run income per capita and capital-labor ratio. D and E are incorrect as only option C is correct.

In the Neoclassical Growth Model, If a Nation's Savings Rate