From an initial steady state,suppose a government policy increases the national saving rate,causing the capital stock to start growing faster than the population.With (K/N)now rising,the Solow growth model goes on to say that (Y/N)
A)will rise only so far,to where the increased requirement for new capital matches the increased saving.
B)will rise only temporarily,so long as the population growth rate remains constant.
C)will rise and keep on rising,so long as the national saving rate exceeds the population growth rate.
D)never does rise,since the government's policy does not affect either the population growth rate or the depreciation rate.

Question

Quizplus · Accepted Answer

In the Solow growth model, when the national saving rate increases, it leads to a higher capital stock growth rate compared to the population growth rate, which increases (K/N), the capital per worker. This results in an increase in (Y/N), output per worker, but only up to a point where the increased requirement for new capital to keep up with the growing economy matches the increased saving. Beyond this point, the growth in (Y/N) stabilizes, reflecting the model's assumption of diminishing returns to capital.

From an Initial Steady State,suppose a Government Policy Increases the National