How is the steady state capital affected when saving rates are increased?

When saving rates in an economy are increased, the steady state capital is positively impacted, leading to an increase until a new steady state is attained. In the context of macroeconomic theory, particularly in the Solow-Swan model of economic growth, the steady state refers to a condition where the economy's capital per worker remains constant over time. This occurs when the amount of investment in capital equals the amount of capital depreciation.

When the saving rate is increased, individuals and firms are setting aside a larger portion of their income for investment. This boost in savings translates into higher levels of investment in capital goods, which ultimately leads to an accumulation of physical capital in the economy. As capital accumulates, the productivity of each worker can rise because more machinery, tools, or infrastructure is available.

As a result, the economy moves towards a new steady state characterized by a higher level of capital per worker, resulting in greater output and potentially higher levels of consumption and welfare in the long run. However, until the new steady state is reached, the economy grows, reflecting the positive effect of the increased savings rate on the overall capital stock. Thus, the correct answer highlights this transitional phase where capital increases in response to higher saving rates.