1. Assume that an economy is initially in a steady state, that population growth
ID: 1101171 • Letter: 1
Question
1. Assume that an economy is initially in a steady state, that population growth and
the rate of technological change are both zero, but that capital depreciates at rate
?. Use the appropriate graphs to illustrate and explain how an increase in the
saving rate would affect all of the following:
a. The steady-state capital stock per worker
b. The steady-state level of output per worker
c. The steady-state rate of growth of output per worker
d. The Golden Rule capital stock per worker
e. The rate of growth of output per worker during the transition from the initial
steady state to the final steady state
Explanation / Answer
a. the steady-state capital stock per worker An increase in the saving rate would shift the sf (k) curve up and increase the steady-state level of capital per worker. b. the steady-state level of output per worker Since k* rises, the steady-state level of output per worker will also rise. c. the steady-state rate of growth of output per worker In the new steady state, the amount of capital per worker will remain constant, so the amount of output per worker will also remain constant, and the steady-state growth rate of output per worker will remain equal to zero. d. the Golden Rule capital stock per worker The Golden Rule level of capital per worker is independent of the saving rate (although only one saving rate will move the economy to the Golden Rule level), so it will not change. e. the rate of growth of output per worker during the transition from the initial steady state to the final steady state. In the initial steady state, the rate of growth of output per worker is zero. Since the level of output per worker is higher in the final steady state, the rate of growth of output per worker will increase during the transition to the final steady state.
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