Consider an economy that is operating at its steady state.An increase in the investment rate in this economy will lead to:
A) an increase in the growth rate of output in both the short run and long run.
B) no change in the growth rates of either capital or output in either the short run or the long run,since the economy is already in the steady state.
C) an increase in the growth rate of output in the short run but lower overall growth in the long run as a result of increased depreciation.
D) an increase in the growth rate of output in the short run but zero growth in output in the long run.

Question

Quizplus · Accepted Answer

An increase in the investment rate initially boosts the growth rate of output as the economy adjusts to a new, higher level of capital stock. However, in the long run, the economy returns to its steady-state growth path, which is determined by the growth rates of technology and labor, not by the investment rate. Thus, the long-run growth rate of output does not change, but there is a higher level of output due to the increased capital stock.

Consider an Economy That Is Operating at Its Steady State