Answer :
When the capital per worker (k) is smaller than the capital per worker at the steady state (k*), it indicates an economy that has not yet reached its long-term equilibrium.
In this scenario, there is potential for capital accumulation and economic growth. When capital per worker is below the steady state, it suggests that the economy has room for investment and expansion. As a result, the marginal productivity of capital tends to be high, leading to higher returns on investment. This encourages firms to increase investment, which in turn raises the capital stock per worker over time and drives the economy towards the steady state.
Conversely, when the capital per worker exceeds the capital per worker at the steady state, it implies a situation of capital over-accumulation. At this point, the returns on investment diminish due to diminishing marginal productivity of capital. Firms may reduce their investment levels, resulting in a gradual decrease in the capital stock per worker. This adjustment aims to restore equilibrium and bring the capital stock back in line with the number of workers.
In summary, a smaller capital per worker relative to the steady state signals potential for capital accumulation and economic growth, while a larger capital per worker suggests a need for a reduction in capital to restore equilibrium.
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