In the Solow model, if a country's saving rate ($\gamma$) increased from 10% to 12% and it was operating at its steady state before the change, we would expect to see:

Question

Quizplus · Accepted Answer

According to the Solow model, the steady state capital stock and output depend on the saving rate. An increase in the saving rate leads to higher investment and higher steady state capital stock. However, in the short run, the increase in savings would lead to a reduction in consumption, which would lead to a decrease in output. But over time as the new steady state is reached, both capital stock and output would increase. Therefore, the correct answer is (D), an increase in both the capital stock and output.

In the Solow Model, If a Country's Saving Rate γ\gammaγ ) Increased from 10% to 12% and It Was Operating

In the Solow Model, If a Country's Saving Rate $\gamma$ ) Increased from 10% to 12% and It Was Operating