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Unformatted text preview: Lecture 3 Implications of The Solow Model ECN/APEC 6000/7230 III  2 The Saving Rate Saving rate s is exogenous in Solow model. How can policy affect saving? Public consumption vs investment decision. Taxes on capital alter return on saving. Later, we will endogenize consumptionsaving decision. For now, we consider how changes in s affect endogenous variables. ECN/APEC 6000/7230 III  3 Saving and Capital Suppose the saving rate increases from s 1 to s 2 . Steady state capital per effective labor increases from k * 1 to k * 2 . ( n + g + ) k s 1 f ( k ) s 2 f ( k ) k k * 1 k * 2 ECN/APEC 6000/7230 III  4 Transition to New Steady State The capital stock does not immediately jump to k * 2 . We have to solve the differential equation with the initial condition k (0) = k * 1 . Since dk (0)/ dt > 0, k will increase. As k increases, dk / dt will return to 0. ). ( ) ( )) ( ( ) ( t k n g t k sf dt t dk + + = ECN/APEC 6000/7230 III  5 Saving and Per Capita Output Per capita output is Since f > 0, steadystate Y / L increases with s . A change in the saving rate has a level effect but not a growth effect on per capita output. The growth rate of Y / L initially jumps above g . As k converges to k * 2 , the growth rate returns to g . The intercept of ln( Y ( t )/ L ( t )) increases but the longterm slope is unchanged....
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This note was uploaded on 01/09/2011 for the course ECON 7230 taught by Professor Feigenbaum during the Spring '10 term at Utah Valley University.
 Spring '10
 Feigenbaum
 Macroeconomics

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