Immediately following the increase in the investment rate,output grows rapidly.As the economy approaches its new steady state,
A)the growth rate gradually increases.
B)the growth rate gradually declines.
C)the growth rate is constant.
D)the growth rate is negative.
E)None of the above is correct.

Question

Quizplus · Accepted Answer

As the economy approaches its new steady state, the effects of the increase in investment rate on output growth start to diminish, leading to a gradual decline in the growth rate. This is because the initial boost in output from the increase in investment is temporary and cannot be sustained in the long term, as the economy needs to adjust and reach a new equilibrium. Thus, the growth rate gradually slows down until it reaches a new steady state level.

Immediately Following the Increase in the Investment Rate,output Grows Rapidly