Answer to Question #144561 in Macroeconomics for natalie

Question

 In words, explain whether there is output growth on the transition path to the steady state and whether there is output growth in the steady state.

Answer 1

Suppose the economy begins with an initial steady-state capital stock below the Golden Rule level. The immediate effect of devoting a larger share of national output to investment is that the economy devotes a smaller share to consumption; that is, “livingstandards” as measured by 

consumption fall. The higher investment rate means that the capital stock increases more quickly, so the growth rates of output and output per worker rise. The productivity of workers is the average amount produced by each worker – that is, output per worker. So productivity growth 

rises. Hence, the immediate effect is that living standards fall but productivity growth rises.

In the new steady state, output grows at rate $n+g$ , while output per worker grows at rate g. This 

means that in the steady state, productivity growth is independent of the rate of investment. Since 

we begin with an initial steady-state capital stock below the Golden rule level, the higher investment rate means that the new steady state has a higher level of consumption, so living standards are higher. Thus, an increase in the investment rate increases the productivity growth rate in the short run but has no effect in the long run. Living standards, on the other hand, fall immediately and only rise 

over time. That is, the quotation emphasizes growth, but not the sacrifice required to achieve