Question

YIAN f(K/AN) f (K AN) K/AN

Refer to the figure above. Suppose the economy is currently in steady state. Furthermore, suppose the current savings rate (the one depicted in the figure) is higher than the golden rule savings rate. Which of the following statements is correct?

To maximize steady state consumption per capita, the economy should aim for a steady state where capital per effective worker is less than D

To maximize steady state consumption per capita, the economy should aim for a steady state where capital per effective worker is equal to E

To maximize steady state consumption per capita, the economy should aim for a steady state where capital per effective worker is more than E

To maximize steady state consumption per capita, the economy should aim for a steady state where capital per effective worker is more than D but less than E

To maximize steady state consumption per capita, the economy should aim for a steady state where capital per effective worker is equal to D

Answer 1

Answer : The answer is option B.

In the given diagram, the initial steady state occurs at point D for the economy. At point D's steady state the current savings rate f (K/AN) is greater than the steady state savings rate sf (K/AN). Based on given diagram, the steady state per capita consumption will be maximum when the economy will reach at point E for steady state. Therefore, option B is correct.