If two economies are identical (with the same population growth rates and rates of technological progress), but one economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower saving rate: A. will be at a lower level than the steady state of the high-saving economy. B. will be at a higher level than the steady state of the high-saving economy. C. will be at the same level as the steady state of the high-saving economy. D. will grow at a slower rate than the high-saving economy

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daiscott2172 daiscott2172

03-09-2019
Business

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If two economies are identical (with the same population growth rates and rates of technological progress), but one economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower saving rate: A. will be at a lower level than the steady state of the high-saving economy. B. will be at a higher level than the steady state of the high-saving economy. C. will be at the same level as the steady state of the high-saving economy. D. will grow at a slower rate than the high-saving economy

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Answer:

A

Explanation:

The Solow model explains steady states. In this model, there is closed economy and there is no government which means that the total production is the sum of the consumption and the investment.

Y=C+I

This means that savings are equal to the investment.

Y-C=I

S=I

Then, there is a production percentage used for consumption(cY) and the other is used to save (sY). But the cost of investment or saving is the capital depreciation. Therefore, an economy reaches a steady state when the cost of saving (depreciation) equals the benefit it.

In the figure attached, the sf(k) curve is the same as sY (saving rate) and the δk is the depreciation curve. This figure shows that a country with a lower saving rate (S2 f(k)) reaches a lower steady state level (intercept between S2 f(k) and δk curve) than a country with a higher saving rate.