In the Solow growth model,an increase in the savings rate

Question

Quizplus · Accepted Answer

According to the Solow growth model, an increase in the savings rate leads to an increase in investment, which eventually leads to an increase in the steady-state level of output per capita. The consumption level at steady state may be lower than before due to increased saving and investment (lower consumption in the short run may lead to higher consumption in the long run). However, the standard of living is improved in the long run due to the higher level of steady-state output per capita. Therefore, the increase in the savings rate does not necessarily reduce the standard of living.

In the Solow Growth Model,an Increase in the Savings Rate