In the Solow model, if a country increases its savings rate:

Question

Quizplus · Accepted Answer

According to the Solow model, an increase in the savings rate leads to an accumulation of capital, which results in higher output and income. This, in turn, increases savings and investment, leading to further growth. As the economy approaches the new, higher steady-state level of capital stock, growth will increase before eventually settling down to a new steady-state level. Therefore, the correct choice is A, i.e., growth increases as the economy moves toward a new, higher steady-state capital stock.

In the Solow Model, If a Country Increases Its Savings