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Introduction to Modern Economic Growth intersection with the horizontal axis, k∗∗ The arrows on the horizontal axis show how the effective capital-labor ratio adjusts gradually to the new balanced growth effective capital-labor ratio, k∗∗ Immediately, when the increase in the saving rate is realized, the capital stock remains unchanged (since it is a state variable) After this point it follows the arrows on the horizontal axis k(t) k(t) k* k(t) k** s’ s f(k(t)) –(δ+g+n) k(t) f(k(t)) –(δ+g+n) k(t) Figure 2.13 Dynamics following an increase in the savings rate from s to s0 The solid arrows show the dynamics for the initial steady state, while the dashed arrows show the dynamics for the new steady state The comparative dynamics following a one-time, unanticipated, permanent decrease in δ or n are identical We can also use the diagrammatic analysis to look at the effect of an unanticipated, but transitory change in parameters For example, imagine that s changes in unanticipated manner at t = t0 , but this change will be reversed and the saving rate will return back to its original value at some known future date t = t00 > t0 In this case, starting at t0 , the economy follows the rightwards arrows until t0 After t00 , the 93