Question

Many people advocate policies to raise the U.S. national saving rate (s). According to the Solow growth model, should a low saving rate be a matter of national concern? What policies might be implemented to raise it?

Answer 1

Saving in short run: According to solow model, rise in saving leads to the rise in productivity and growth rate. rise in saving and investment contribute towards the growth rate of economy.

Saving Long run: Solow does not hold view that saving in long run increases growth rate. Rise in saving and investment would cause rise in output only but it does not affect growth rate of economy.

Policies to raise it:

• Increasing interest rate: government must make policy to raise the interest rate so that people would be attracted towards saving more income.
• saving schemes introduction by the government can incentivize people to save more.
• Tax rebates can be offered by the government if people save part of disposable income.