Graphically illustrate and explain the effects of a reduction in the saving rate on the Solow growth model. In your answer, you must clearly label all curves and the initial and final equilibria. In your answer, explain what happens to the rate of growth of output per worker and the rate of growth of output as the economy adjusts to this decrease in the saving rate.

What will be an ideal response?


The graph is easy. The saving rate reduction causing the saving/investment function to shift down. K/NA and Y/NA will fall to some permanently lower level. The growth rates of Y and Y/AN will temporarily decrease and then return to their original levels.