Suppose an economy is initially in a steady state with capital per worker below the Golden Rule level. If the saving rate increases to a rate consistent with the Golden Rule, then in the transition to the new steady state consumption per worker will:

Question

Quizplus · Accepted Answer

When the saving rate increases to the Golden Rule level, initially more resources are diverted to investment, reducing consumption per worker. Over time, as the capital stock grows, output and consumption per worker increase, eventually surpassing the initial level.

Suppose an Economy Is Initially in a Steady State with Capital