In the Solow model, if a country's saving rate increases, the country:
A) moves from a relatively low steady state to one that is lower.
B) moves from a relatively low steady state to one that is higher.
C) moves from a relatively high steady state to one that is lower.
D) stays at a constant high steady state.
E) stays at a constant low steady state.

Question

Quizplus · Accepted Answer

In the Solow model, an increase in saving rate leads to an increase in capital stock, which leads to an increase in output. This increase in output moves the economy to a higher steady state. Therefore, if a country's saving rate increases, it will move from a relatively low steady state to one that is higher.

In the Solow Model, If a Country's Saving Rate Increases