The convergence to a steady-state capital-labor ratio k* is ensured by the fact that if k is at a level
A)lower than k*, saving will exceed the investment required to maintain a constant k, causing k to rise
B)lower than k*, investment will exceed saving, leading to an increase in the capital stock
C)lower than k*, saving will exceed the investment required to maintain a constant k, causing output per capita to decline
D)higher than k*, the rate of depreciation will be higher than the savings rate, causing k to decrease
E)higher than k*, output per capita will continue to increase until a new steady-state equilibrium is reached

Question

Quizplus · Accepted Answer

If the capital-labor ratio k is lower than the steady-state level k*, the amount of saving will be greater than the amount of investment needed to maintain a constant level of capital. This excess saving will result in an increase in investment and hence an increase in the capital stock, causing k to rise towards the steady-state level k*. Once k reaches k*, investment will equal saving, and the economy will reach a new steady state. Therefore, the convergence to the steady-state capital-labor ratio k* is ensured by the adjustment in saving and investment.

The Convergence to a Steady-State Capital-Labor Ratio K* Is Ensured