Question

1 Savings and Growth

Many households have been forced to reduce savings in response to the COVID-19 crisis. Using the growth model, consider the impacts on long-run growth from a reduction in the savings rate. Provide a graph that clearly illustrates the effects along with a brief discussion. Be sure to mention the effects on the long-run growth rate.

Answer 1

According to the Harrod Domar growth model,growth rate depends on the function of savings rate.Savings provide the necessary fund for investment in the economy and investment creates growth. It lays stress on increasing domestic savings as savings are necessary for investment.A low savings rate means consumer spending is too high and there is insufficient fund in the economy for investment.In the short run low savings will increase standard of living but in the long run low savings rate will mean less funds available for investment and thus economic growth will suffer.