Graphically illustrate and explain the effects of an increase 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 increase in the saving rate.

What will be an ideal response?


The graph is easy. The saving rate increases causing the saving/investment function to shift up. K/NA and Y/NA will rise to some permanently higher level. The growth rates of Y and Y/N will temporarily increase and then return to their original levels.