Intermediate Macroeconomics: Why Saving More Can't Grow Forever
Growth models, consumption and investment, open-economy policy, expectations, business-cycle theories and public debt, explained through their most counterintuitive results.
Try 3 questions
1. In the Solow model, what does a permanent rise in the saving rate do in the long run?
- Raises the level of income, not its growth
- Raises the growth rate of income forever
- Changes neither income levels nor growth
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Answer: Raises the level of income, not its growth
Higher saving builds more capital until depreciation catches up; the economy reaches a higher steady state but then grows at the old rate.
2. In the Solow model, what is the only source of sustained growth in income per person?
- Faster population growth
- Technological progress
- Ever higher saving
Show the answer
Answer: Technological progress
Capital faces diminishing returns, so only continual improvements in technology keep output per worker rising in the long run.
3. The 'golden rule' saving rate in the Solow model maximizes what?
- Investment per worker
- Output per worker
- Consumption per worker
Show the answer
Answer: Consumption per worker
Saving more always raises steady-state output, but past a point the extra investment needed to maintain capital eats into consumption.
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