Suppose the economy is initially in the steady state. An increase in the depreciation rate (6) will cause:
A) a decrease in Y/N.
B) a decrease in C/N.
C) a decrease in K/N.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

An increase in the depreciation rate reduces the amount of capital that remains in the economy after depreciation. This leads to a decrease in the capital-to-labor ratio (K/N), which in turn reduces output per worker (Y/N) and consumption per worker (C/N), as the economy adjusts to a new, lower steady state of capital.

Suppose the Economy Is Initially in the Steady State