Question

use the following information to answer the next two questions consider the solow (classical) growth model for an economy at its steady state level of output. assume the steady state output is well below the golden rule level of output. suppose that a government education campaign promoting greater individual financial responsibility results in a small increase in the savings rate. 6. the immediate effect of the increase in the savings rate is that: (a) consumption increases and output increases. (b) consumption decreases and output increases. (c) consumption remains unchanged and output increases. (d) consumption increasesand output is unchanged. (e) consumption decreases and output is unchanged. 7. relative to the original steady state, the new steady state: (a) level of consumption increases and output increases. (b) level of consumption decreases and output increases. (c) level of consumption remains unchanged and output increases. (d) level of consumption increases and output is unchanged. (e) level of consumption decreases and output is unchanged

Answer 1

An increased savings rate in the Solow model leads to immediate decrease in consumption and increase in output, and eventually results in higher levels of both consumption and output at the new steady state.

Step-by-step explanation:

The immediate effect of an increase in the savings rate within the context of the Solow (classical) growth model is that: (b) consumption decreases and output increases. This happens because more resources are diverted from consumption to investment, leading to increased capital accumulation and thus higher future output.

Relative to the original steady state, the new steady state, caused by an increased savings rate that is still below the golden rule level of savings, would result in: (a) the level of consumption increases in the long run as the economy grows due to higher levels of investment, and output increases. Eventually, the economy reaches a new steady state with a higher stock of capital which leads to higher output and consumption.