Answer to Question #250766 in Economics for Tenn

Question

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

Answer 1

An increase in the saving rate leads to an increase, then to a decrease, in consumption per worker in steady state. It takes a long time for output to adjust to its new higher level after an increase in the saving rate. Put another way, an increase in the saving rate leads to a long period of higher growth.

A higher saving rate does mean less consumption, but it could also result in more capital investment and, ultimately, a higher rate of economic growth. In this respect, it is interesting that the growth rate of real GDP has been higher on average when the personal saving rate is rising than when it is falling.