What would happen to consumption if the steady-state capital decreases?

The correct answer highlights a fundamental relationship in macroeconomic theory regarding the steady-state and capital accumulation. If the steady-state capital level decreases, it signifies that there is less capital available per worker in the economy. This reduction directly affects productivity since capital is a key factor in determining how much output a worker can produce.

When there is less capital per worker, the productivity of each worker diminishes, leading to a decrease in total output. As a result, total consumption will also decline because consumption is often closely linked to income levels and output in the economy. With a lower output due to reduced capital, households will have less income to consume, resulting in decreased consumption overall.

This interaction between capital, productivity, and consumption is central to understanding growth models in macroeconomics, where the amount of capital directly influences economic outcomes such as consumption levels.