In the Solow model, increasing the saving rate affects long-run outcomes by increasing which of the following?

In the Solow model, increasing the saving rate affects long-run outcomes by increasing which of the following?

• A. The long-run growth rate
• B. The steady-state level of capital and output
• C. The population growth rate
• D. The technology level

Answer: (B)

In the Solow model, the saving rate determines how much of output is saved and invested, which drives capital accumulation. Because capital has diminishing returns, increasing investment raises the capital stock until depreciation and population growth balance it, moving the economy to a new steady state with more capital and higher output. The long-run growth rate, however, is set by technology progress (and population growth, which is exogenous), so it does not change with the saving rate. Therefore, raising the saving rate changes the steady-state level of capital and output, not the long-run growth rate.

In the Solow model, the saving rate determines how much of output is saved and invested, which drives capital accumulation. Because capital has diminishing returns, increasing investment raises the capital stock until depreciation and population growth balance it, moving the economy to a new steady state with more capital and higher output. The long-run growth rate, however, is set by technology progress (and population growth, which is exogenous), so it does not change with the saving rate. Therefore, raising the saving rate changes the steady-state level of capital and output, not the long-run growth rate.