Figure 8.1

-Refer to Figure 8.1.Suppose the economy is originally in steady state at k*₁.If the saving rate increases from s₁ to s₂,

Question

Figure 8.1 -Refer to Figure 8.1.Suppose the economy is originally in steady state at k*₁.If the saving rate increases from s₁ to s₂,

Quizplus · Accepted Answer

When the saving rate increases, the economy moves along the per-worker production function to a new steady state with a higher capital stock (k₂ > k₁), where investment is greater than depreciation. As the economy approaches the new steady state, the increase in investment initially exceeds the increase in saving, resulting in a short-term decrease in consumption. However, in the long run, the higher capital stock leads to higher output per worker and consumption.

Figure 8.1 -Refer to Figure 8.1.Suppose the Economy Is Originally in Steady