Suppose an economy is initially in a steady state with capital per worker exceeding the Golden Rule level. If the saving rate falls to a rate consistent with the Golden Rule, then in the transition to the new steady state, consumption per worker will:

Question

Quizplus · Accepted Answer

When the saving rate falls to a rate consistent with the Golden Rule, the economy will experience a transition towards a new steady state. During this transition period, consumption per worker will first fall below the initial level, as the economy invests more and saves less, leading to lower output and consumption. However, as the economy reaches the new steady state, consumption per worker will eventually rise back above the initial level, due to the higher level of capital per worker and increased productivity. Thus, option B is the correct answer.

Suppose an Economy Is Initially in a Steady State with Capital