All things equal, an economy with a higher capital share of income, α,relative to an economy with a smaller capital share will:
A) experience a shorter transitional period to a new steady state whenever saving rates change.
B) experience a longer transitional period to a new steady state whenever saving rates change.
C) experience the same transitional period to a new steady state whenever saving rates change.
D) experience no transitional period.

Question

Quizplus · Accepted Answer

An economy with a higher capital share of income, α, will have a higher marginal product of capital, which means that the return on savings will be higher. Therefore, a change in saving rates will have a greater impact on investment and capital accumulation, leading to a longer transitional period to a new steady state.

All Things Equal, an Economy with a Higher Capital Share