<p><img src="https://i.sstatic.net/nwqVu.jpg" alt="enter image description here"></p>

<p>Yes the answer should be C. I have attached an image showing the variation with time of the variables <span class="math-container">$y$</span>(per capita output), <span class="math-container">$c$</span>(per capita consumption) and <span class="math-container">$i$</span>(per capita investment). I am assuming at <span class="math-container">$t=t_0$</span> the savings rate is increased. </p>

<p>The consumption per capita initially will fall because the savings rate has increased. Eventually it must go above the initial per capita consumption because of the Golden Rule condition.</p>

<p>Cheers!</p>

CC BY-SA 4.0
2019-04-13T10:50:56.683Z
2019-04-15T10:18:55.447Z
2019-04-15T10:18:55.447Z
Vizag
<p>This question is in context of this problem I was trying to solve:</p>

<p><a href="https://i.sstatic.net/QwBh0.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/QwBh0.png" alt="enter image description here"></a></p>

<p>The answer given is (a). But I think the answer is (C). My arguments are as follows:</p>

<ul>
<li>First, the golden rule level of capital <strong>corresponds</strong> to one and only one savings rate, <span class="math-container">$ s^* $</span>. </li>
<li>Thus, to reach <span class="math-container">$ s^* $</span>, we need to increase the savings rate (since the economy starts off below the golden rule of capital accumulation steady state). </li>
<li>Increasing savings reduces consumption initially.</li>
<li>But increased savings stimulate investment, which increases production, which ultimately increases income and thus **increases consumption in the long run.</li>
</ul>

<p>Is my answer correct, speaking strictly in terms of academic Solow Model theory and with the information given in the question? If wrong, why?</p>

<solow>
If an economy has capital that is less than the golden rule level of capital, can we reach the golden rule without increasing the savings rate?
WorldGov
# If an economy has capital that is less than the golden rule level of capital, can we reach the golden rule without increasing the savings rate?

(Asked by: username_0 on 2019-04-12)

This question is in context of this problem I was trying to solve:

[![enter image description here](https://i.sstatic.net/QwBh0.png)](https://i.sstatic.net/QwBh0.png)

The answer given is (a). But I think the answer is (C). My arguments are as follows:

* First, the golden rule level of capital **corresponds** to one and only one savings rate, $ s^\* $.
* Thus, to reach $ s^\* $, we need to increase the savings rate (since the economy starts off below the golden rule of capital accumulation steady state).
* Increasing savings reduces consumption initially.
* But increased savings stimulate investment, which increases production, which ultimately increases income and thus \*\*increases consumption in the long run.

Is my answer correct, speaking strictly in terms of academic Solow Model theory and with the information given in the question? If wrong, why?

**Tags:** solow

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## 1 answers

### Answer by username_1 on 2019-04-13. Score: 3

![enter image description here](https://i.sstatic.net/nwqVu.jpg)

Yes the answer should be C. I have attached an image showing the variation with time of the variables $y$(per capita output), $c$(per capita consumption) and $i$(per capita investment). I am assuming at $t=t\_0$ the savings rate is increased.

The consumption per capita initially will fall because the savings rate has increased. Eventually it must go above the initial per capita consumption because of the Golden Rule condition.

Cheers!


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