Answer to Question #285930 in Macroeconomics for Shek Ahmed

Question

Use a graph to demonstrate, in the Solow Model, how the saving rate affects the steady- state income level. In the model, does the saving rate affects the steady- state growth rate of income or growth rate of income per worker? Why or why not?

Answer 1

According to Solow model, a higher saving rate does not have a permanent effect on the growth rate.

Where;

(g+d)k= growth rate of technology and depreciation per worker

(Saf)k= Savings function of capital per worker

K* = Capital per worker

In the model, the saving rate does not affect the steady-state growth rate of income or growth rate of income per worker because the saving rate has a level and not growth effect on the steady-state of growth path according to Solow. Solow claims that the savings rate has an effect only in the short run.