Question

YIAN f(K/AN) f (K AN) K/AN

Refer to the figure above. Suppose this economy is currently in steady state. Now, suppose that population growth slows down. That is, population grows at a slower rate than it was growing before. Which of the following statements must be correct?

Once the economy reaches a new stead state, capital per effective worker will equal D

More information is needed in order to know what capital per effective worker will be once the economy reaches a new steady state.

Once the economy reaches a new stead state, capital per effective worker will be more than E

Once the economy reaches a new stead state, capital per effective worker will be less than D

Once the economy reaches a new stead state, capital per effective worker will be more than D but less than E

Once the economy reaches a new stead state, capital per effective worker will equal E

Answer 1

The correct answer is E because the slow down in the population growth will shift the $(\delta +g_{A} +g_{N})K/AN$ line downward thus the new steady state will be at point E.