Question

If an economy is in a steady-state with no population growth or technological change and the capital stock is above the Golden Rule level and the saving rate falls:
a. output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.
b. output, consumption, investment, and depreciation will all decrease.
c. output and investment will decrease, and consumption and depreciation will increase and then decrease but finally approach levels above their initial state.
d. output and investment will decrease, and consumption and depreciation will increase.

Answer 1

Answer: A. output, investment, and depreciation will decrease and consumption will increase and then decrease but finally approach a level above its initial state.

Explanation: from the above question, an economy that is in a steady-state with no population growth or technological change and the capital stock is above the Golden Rule level and the saving rate falls then output, investment, and depreciation will decrease and consumption will increase and then decrease but finally approach a level above its initial state.

Answer 2

Answer:

c. output and investment will decrease, and consumption and depreciation will increase and then decrease but finally approach levels above their initial state.

Explanation:

If an economy is in a steady state with no population growth or technological change and the capital stock is above the Golden Rule level and the saving rate falls: output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.

The Golden Rule capital stock is the level at which MPK = δ, so that the marginal product of capital equals the depreciation rate. When the economy begins above the Golden Rule level of capital, reaching the Golden Rule level leads to higher consumption at all points in time.

Therefore since in the scenario, capital stock is above golden rule level, consumption will rise, and fall as it approaches golden rule.