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Suppose policy makers wish to increase steady state consumption per worker

Economics Dec 18, 2020

Suppose policy makers wish to increase steady state consumption per worker. Explain what must happen to the saving rate to achieve this objective.

Expert Solution

To achieve a surge in steady-state consumption per worker, the saving rate must reduce. Therefore, the policymakers should devise policies that would encourage consumption and discourage savings. For instance, the government can reduce the interest rates. A decrease in the interest rates will lower the cost of borrowing and hence individuals will borrow money to spend. On the contrary, if the interest rates decline, the return for saving scales back. Consumers will, therefore, choose to spend money rather than saving.

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