3. You should be able to tell whether the following statements are t rue, false
ID: 1133264 • Letter: 3
Question
3. You should be able to tell whether the following statements are t rue, false or uncertain and also be able to justify your answer. (i) A higher rate of investment can sustain a higher growth rate of output forever (i) If capital never depreciated, growth would continue forever. (ii) The higher the savings rate, the higher is consumption in the steady state. 4. Consider the following statement: The Solow model she ws that the saving rate does not affect the growth rate in the long run, so we should stop worrying about the low Australian saving rate. Increasing the saving rate wouldn't have any important effects on the economy. Do you agree or disagree? 5. Discuss the likely impact of the following policy changes on the level of output per worker: (@) The right to exclude saving from income when paying income tax. (i) A higher rate of female participation in the labor force (for a given-sized population).Explanation / Answer
Q-3
(i) FALSE
As investment rate and savings rate are same So when there is an increase in savings rate it will lead to growth for a short time then it will come back to equilibrium (no long term growth).
(ii) False,
Increasing capital leads to growth but the growth rate wiill decrease with time until it becomes 0 due to decrease in returns of scale. So when it is 0, on increase in capital the productivity will not increase.
(iii) Uncertain
Golden-rule:- highest level of permanent consumption that will be sustained.
if savings rate is more than golden-rule then on increase in savings rate there will be decrease in consumption.
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