Question

If the per-worker production function is y = Ak, where A is a positive constant, in the steady state, a:

A) lower saving rate does not affect the growth rate

B) higher saving rate does not affect the growth rate

C) lower saving rate leads to a higher growth rate

D) higher saving rate leads to a higher growth rate

Answer 1

Option D.

• If the per worker production function is Y = AK, where A is a positive constant , in the steady state, a higher saving rate leads to a higher growth rate.
• In a steady state when the saving rate is higher, the growth rate also increases.
• This is because a higher savings rate leads to a higher level of steady state capital stock and a greater output level.
• In the production function when A is a positive constant then the growth rate increases with a higher savings rate.