f two economies have the same saving rate, population growth rate, depreciation
ID: 1227308 • Letter: F
Question
f two economies have the same saving rate, population growth rate, depreciation rate and rate of growth of labor efficiency, and one economy begins with a smaller capital stock, then the steady-state level of income per effective worker (y^*) in the economy that begins with the smaller capital stock:
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1) Will be at a lower level than the steady state of the high capital economy. 2) Will be at a higher level than the steady state of the high capital economy. 3) Will be at the same level as the steady state of the high capital economy. 4) Will be proportional to the ratio of the capital stocks in the two economies.Explanation / Answer
When the economy begins with less capital than suggested by the Golden Rule steady state, the policymaker should adopt policies that raise the rate of saving.
This would cause an immediate fall in consumption and an increase in investment. Investment will now be more than the amount of depreciation which again implies that the economy is no longer in its steady state.With time, the capital stock rises and output increases. This implies that if policymakers in both countries are pragmatic, they would end up in achieving the same level of output per worker.
Hence the correct option is C.
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