Answer to Question #317762 in Macroeconomics for Ravi

Question

Explain why an increase in saving in the Solow model has a level effect but not a growth

effect.

Answer 1

A higher saving rate does not permanently affect the growth rate in the Solow model. A higher saving rate does result in a higher steady-state capital stock and a higher level of output. The shift from a lower to a higher steady-state level of output causes a temporary increase in the growth rate.