In the Solow growth model with diminishing marginal returns to capital, explain what happens when the...

In the Solow growth model with diminishing marginal returns to capital, explain what happens when the savings rate increases.

Expert Solution

I will answer the given question in following 2 parts

What is Solow growth model
What happens in given condition of increase in savings rate when there are diminishing marginal returns to capital in the model

1. What is Solow growth model-It is a model which tells how an economy will change over a time with change in certain factors suchas population growth,savings rate,technological progress,change in capital etc.,developed by Robert Solow,it is one the most important concepts of growth in an economy.

2.What happens in given condition of increase in savings rate when there are diminishing marginal returns to capital in the model-Now hat this condition stipulates is that over the period of time when capital keeps on getting accumulated,returns keeps on diminishing,that is if people are saving more and accumulating more capital,returns from that accumulation decreases or in other words in short run an increase in savings helps in more capital accumulation leading to more growth,however in long run,capital accumulation in savings do not lead to such growth,so in long run savings do not help an economy grow,that is it faces strong resistance in terms of economic growth,so to summarize in long run when there are diminishing returns to capital,increase in savings rate is of not much help in economic growth.

It is very important to note that a lot of economies which show promise in short period struggle to sustain that momentum which is why other factors such as technological progress becomes much more important for the economy.

Answer is complete.Thank you!

Rahul Sunny answered 2 hours ago

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solow growth model describes what

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