In the Solow growth model with constant technology, a permanent increase in the saving rate leads to which long-run outcome?
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Get StartedIn the Solow growth model with constant technology, a permanent increase in the saving rate leads to which long-run outcome?
Options:
- A permanently higher level of output per worker but no change in long-run per-capita growth rate
- A permanently higher per-capita growth rate driven by capital accumulation
- A lower steady-state output per worker due to diminishing returns
- No change in either level or growth of output per worker
Correct answer: A permanently higher level of output per worker but no change in long-run per-capita growth rate
Explanation: In Solow (1956), raising the saving rate raises the steady-state level of capital and output per worker, but long-run per-capita growth remains driven by exogenous technology, not savings. The mechanism is diminishing returns to capital.
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