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c. How will simultaneous increases in the population growth rate and the savings rate effect per-capita...

c. How will simultaneous increases in the population growth rate and the savings rate effect per-capita income in the “standard” (constant returns to scale) Solow growth model? Show graphically, and briefly explain. This is a “qualitative”, not a quantitative question.

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Answer #1

The simultaneous increase in population growth rate and saving rate will interact with each other to keep the per capita income at the same level.

We know that the population growth rate decreases the steady state level of output. This in turn decreases the per capita income. On the other hand, increase in saving rate will increase the steady state level of output, thus increasing the per capita income.

If both these forces interact in such a way that the negative impact is exactly balanced by the positive impact, the steady state level of output will stay the same and there will be no change in per capita income.

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