Suppose there is an increase in the saving rate.This increase in the saving rate must cause an increase in consumption per capita in the long run when
A)capital per worker approaches the golden-rule level of capital per worker.
B)the saving is used for education rather than physical capital.
C)the rate of saving exceeds the rate of depreciation.
D)there is no technological progress.
E) technological progress depends on human capital.

Question

Quizplus · Accepted Answer

In the long run, as capital per worker approaches the golden-rule level, savings will be invested in the most productive manner, leading to an increase in output per worker and consumption per capita. This is in line with the Solow growth model, which suggests that increasing savings leads to greater investment and long-run economic growth. Thus, the increase in saving rate will cause an increase in consumption per capita in the long run when capital per worker approaches the golden-rule level. Option B is incorrect because education is not directly linked to an increase in consumption per capita. Option C is incorrect because even if the rate of saving exceeds the rate of depreciation, it does not necessarily lead to an increase in consumption per capita. Option D is also incorrect because technological progress can increase the production possibilities and hence the level of output, leading to higher consumption per capita. Option E is irrelevant as human capital can lead to technological progress, but it does not directly determine the relationship between the saving rate and consumption per capita.

Suppose There Is an Increase in the Saving Rate