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