Suppose the economy is initially in the steady state.A reduction in the depreciation rate (δ)will cause
A)an increase in K / N.
B)an increase in Y / N.
C)an increase in C / N.
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

A reduction in the depreciation rate means that capital depreciates more slowly. This leads to an accumulation of capital (K) over time, as it is not being reduced as quickly by depreciation. As a result, the capital-to-labor ratio (K/N) increases because there is more capital available per worker. This increase in capital per worker (K/N) leads to an increase in output per worker (Y/N) due to higher productivity. Finally, with higher output per worker, consumption per worker (C/N) also increases, assuming a portion of the increased output is directed towards consumption. Therefore, all of the statements A, B, and C are correct, making D the correct choice.

Suppose the Economy Is Initially in the Steady State