If saving rate increases, with the labor force growth rate, capital stock depreciation rate, and growth rate of the efficiency of labor held constant,
A) the capital-output ratio will decrease.
B) the capital-output ratio will increase.
C) the output-capital ratio will increase.
D) the level of investment will decrease.

Question

Quizplus · Accepted Answer

When the saving rate increases, assuming other factors like labor force growth rate, capital stock depreciation rate, and growth rate of the efficiency of labor are constant, more resources are allocated for investment in capital. This leads to an increase in the capital stock over time, raising the capital-output ratio because the output does not increase at the same rate as capital does in the short run.

If Saving Rate Increases, with the Labor Force Growth Rate