1. Suppose the economy is originally in a steady state and the saving rate is lo

Question

1. Suppose the economy is originally in a steady state and the saving rate is lower

than the golden rule saving rate. We know with certainty that a reduction in the

saving rate will cause

(a) no change in consumption per worker in the long run.

(b) an increase in consumption per worker in the long run.

(c) no change in consumption per worker in the short run.

(d) an increase in consumption per worker in the short run.

2. The economy is originally in a steady state and capital per worker is above the

golden-rule level. Assuming no population growth or technological progress, an

increase in saving rate will

(a) decrease consumption in both the short run and the long run.

(b) increase consumption in both the short run and the long run.

(c) decrease consumption in the short run, and increase it in the long run.

(d) increase consumption in the short run, and decrease it in the long run.

correct answers and explain

Explanation / Answer

1)Ans is D

A decrease in saving rate will intially increase the consumption per worker but in long run it will decrease the steady state of output and can decrease the consumption per worker in long run. But in short run Consumption will increase

2)ans is C

Imcrease in saving rate will decrease consumptiom per worker in short run but due to increasing saving rate, income increases and consumption in long run can rise if output effect is greater than saving effect.

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