In: Economics
Solow model : Horizontl axis represents the capital stock per worker and vertcal axis represents the investment, depreciation , output per worker.
At steady state there is a breakeven investment point . This implies that where the line from the orign cuts the investment curve.
Now, if the capital per worker is greater than steady state . It is represented by k1 in the above figure.
Initially , to came back k to the staedy state level .Savings decreases and therefore, consumption increases. And investment decreases. Therefore, investment decreases. Now, investment is less than the total depreciation.
So, capital per worker rises , as a result investment decreases further and output decreases. And therefore, consumtpion per wokrer also decreases. But this consumption level is greater than the old steady state consumtpion level.
Therefore, over time, k move towards the staedy level by decreasing the savings rate.