Suppose the saving rate is initially greater than the golden rule saving rate.We know with certainty that an increase in the saving rate will cause
A)an increase in the rate of growth in the long run.
B)a reduction in output per worker.
C)a reduction in consumption per worker.
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

When the saving rate is initially greater than the golden rule saving rate, an increase in the saving rate will not increase the long-run growth rate (which is determined by technological progress and population growth in the Solow model) but will reduce consumption per worker because more resources are being diverted from consumption to savings, leading to overaccumulation of capital and diminishing returns. Output per worker may increase initially due to more capital accumulation, but the effect on long-run growth rate and consumption per worker is negative.

Suppose the Saving Rate Is Initially Greater Than the Golden