Figure 10-4
-Initially, the economy is at point G in the figure above A change in per capita savings ________ will after complete adjustment ________.

Question

Figure 10-4 
-Initially, the economy is at point G in the figure above A change in per capita savings ________ will after complete adjustment ________.

Quizplus · Accepted Answer

A decrease in per capita savings will shift the economy from point G to point X. At point X, the level of capital per worker is lower than before, which leads to a lower output per capita. As a result, people may choose to work harder (i.e. longer hours or higher effort) to maintain their consumption level, and this increase in labor input will raise output per capita. As the economy adjusts to the new equilibrium at point E, the growth rate of output per capita will be higher than before due to the increase in labor input. Thus, a change in per capita savings from point G to point X will lead to a higher growth rate of output per capita after complete adjustment.

Figure 10-4 -Initially, the Economy Is at Point G in the Figure