Question

Consider the effects of an increase in the saving rate in the United States capital-labor ratio, according to the Solow model. The immediate effect of a saving rate increase would:

a. begin to increase the capital-labor ratio, increase output per worker, and reduce consumption per worker.
b. not immediately increase the capital-labor ratio, increase output per worker, and reduce consumption per worker.
c. begin to increase the capital-labor ratio, increase output per worker, and increase consumption per worker.
d. begin to increase the capital-labor ratio, not immediately increase output per worker, and reduce consumption per worker.

Answer 1

Answer: d. begin to increase the capital-labor ratio, not immediately increase output per worker, and reduce consumption per worker.

Step-by-step explanation:

According to Solow, the accumulation of capital and labor are vital for economic growth. The Solow model believes that sustained increase in the investment of capital will only lead to a temporary rise in growth rate only as a result of the rise in capital to labour ratio.

He however believes that this may lead to a reduction in the marginal product of capital that were added and therefore such economy will revert back to long term growth as there'll be productivity in such economy.

The effect of an increase in the saving rate in the United States capital-labor ratio, according to the Solow model is that the immediate effect of a saving rate increase would begin to increase the capital-labor ratio, not immediately increase output per worker, and reduce consumption per worker.