Suppose an Economy Experiences a Decrease in the Saving Rate

question 3

Multiple Choice

Suppose an economy experiences a decrease in the saving rate. As the economy adjusts to this, we would expect output per worker:

• A) to decrease at a permanently higher rate.
• B) to decrease at a high rate temporarily and the rate of decrease goes to zero in the steady state.
• C) to decrease slower at the beginning, then faster, and then at a constant rate in the steady state.
• D) to decrease at a constant rate and continue increasing at that rate in the steady state.
• E) to first increase, then decrease at an increasing rate, then increase at a constant rate in the steady state.

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Definitions:

Disposable Income

Available financial assets to households for investments and outlays after income taxes have been applied.

Government Spending

Expenditures by government bodies on goods and services, including salaries, infrastructure, and welfare programs.

Tax

A compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Government Expenditure

Government Expenditure includes all government consumption, investment, and transfer payments, such as spending on infrastructure, welfare programs, and public services.