Question

2) Suppose that the government passes a law requiring households to increase savings 10% above previous levels. According to Solow's growth theory, in the long run output per capita will grow less rapidly.

Answer 1

Solution:

The statement is false.

According to Solow’s growth theory, in the long-run output per capita will increase at a higher rate, since a higher saving rate will result in a higher steady-state capital stock and a higher level of output.