Question

In the Solow growth model. if the saving rate increases, then output per person ___________ and...

In the Solow growth model. if the saving rate increases, then output per person ___________ and consumption per person ___________.

A. may increase or decrease; decreases.

B. increases; may increase or decrease.

C. increases; decreases.

D. decreases; may increase or decrease.

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Answer #1

An increase in saving rate in Solow model will increase the capital per worker (because investment will increase), due to increase in capital per worker the output per worker will also increase.

The effect of increase in saving rate on consumption per worker is uncertain, it may increase or decrease because increase in saving rate can decrease the consumption per worker, but consumption per worker can also increase because of increase in output per worker, so the net impact on consumption per worker is uncertain.

So, the correct answer is an option (B).

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