Question

18）At the current steady state capital - labor ratio, assume that the steady state level of per capita consumption, ( C N ) ∗, is less than the golden rule level of steady state per capita consumption. Given this information, we can be certain that:

A.An increase in the saving rate will cause an increase in the steady state level of per capita consumption .

B.A decrease in the capital-labor ratio will cause a decrease in the steady state level of per capita consumption.

C.The capital-labor ratio will tend to increase over time.

D.The capital-labor ratio will tend to decrease over time.

E.A decrease in the saving rate will have an ambiguous effect on the steady state level of per capita consumption.

20.What happens to the AD curve when the economy is in the liquidity trap with a zero interest rate?

A.The AD curve becomes vertical.

B.The AD curve becomes horizontal.

C.The AD curve becomes upward-sloping.

D.The AD curve becomes downward-sloping.

E.The AD curve becomes U-shaped.

Answer 1

1> C.The capital-labor ratio will tend to increase over time.

If the consumption level is lower than the golden rule, then the savings rate will be higher than the golden rule. so the capital-labor ratio will increase as more savings will produce more capital.

2> The AD curve becomes horizontal.

The aggregate demand is horizontal as in a liquidity trap, monetary policies become ineffective, so the aggregate demand does not increase with lowering interest rate.