Answer to Question #236395 in Macroeconomics for KAT

Question

Suppose the saving rate were increased from 6 to 12 percent in Pakistan. What predictions does the neoclassical growth model have for the effect this would have on per capita income in Pakistan over the next 30 years?

Answer 1

Changes in the savings rate affect only the short-run growth rate of the economy. Increase in the savings rate causes both capital per head and income per head to rise. Long-run growth rate of the economy remains unaffected by the increase in the savings rate. Their is an increase in per capita income which leads to the growth in output per head.