Starting from a steady-state situation, if the saving rate increases, the rate of growth of capital per worker will:
A)increase and continue to increase unabated.
B)increase until the new steady state is reached.
C)decrease until the new steady state is reached.

Question

Quizplus · Accepted Answer

When the saving rate increases, the amount of investment per worker increases, which in turn increases the rate of capital accumulation per worker. This leads to an increase in the rate of economic growth until a new, higher steady-state level of output per worker is reached. Once the new steady state is reached, the rate of growth of capital per worker will return to its original level but at a higher level of output per worker.

Starting from a Steady-State Situation, If the Saving Rate Increases