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Discuss and illustrate graphically how a decrease in saving rate will affect the steadystate level of...

Discuss and illustrate graphically how a decrease in saving rate will affect the steadystate level of capital and output. Also illustrate graphically the transition of capitaland output fromtheir old steady state level to new one.

( Solow Model, please graph (two of them) and explain in details)

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Answer #1

decrease in savings basically lead to level effect, the level of per cpita output is decreased in equilibrium,

as savings are decreased the investment will decrease relative to the depreciation thus the steady state of capital will start to fall and also the steady stats of output,

the balance is restored at a lower level of steady state of output and capital,

in the digram on Y asix there is output and we can see that steady state of output will also decrease,

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