Answer to Question #169534 in Microeconomics for Julie

Question

Please explain in three well-structured paragraphs the impact of a change in the savings rate on the output.

Answer 1

A higher saving rate results to a higher stable -state capital stock and a higher level of output. The rise from a lower to a higher stable -state level of output causes a temporary increase in the growth rate. A higher saving rate may permanently raise the rate of economic growth.

A rise in the population growth rate increases the growth rate of aggregate output but has no permanent effect on the growth rate of per capita output. An increase in the population growth rate reduces the stable-state level of per capita output.

The capital income tax rate has no permanent effect on the growth rate of output. A rise in the capital income tax rate reduces the saving rate, however.