Question

In the solow model, how does increasing or decreasing population growth affect the graph? How does the saving rate affect the graph? Please explain and show examples.

Answer 1

In the Solow model, an increase in the population growth rate increases the growth rate of aggregate output. But it has no permanent effect on the growth rate of per capita output. It lowers the steady state level of per capita output. ( See from E to F). Capital per worker also reduces( k*1 to k*2)

Vice versa for decrease in population growth rate.

An increase in savings rate results in higher steady state capital stock and a higher level of output. This shift causes a temporary increase in the growth rate till new steady state is reached. In the long run it will have no effect on growth rate. Vice versa for decrease in savings rate.

In the graph, the effect of increasing savings rate and population growth is shown.

The decreasing savings rate and population growth can be shown by the downward movement of respective line.