What is the reason causing the saving rate at such level

Reference no: EM132200710

Question: General Solow Model Supose initially the economy stays at the steady state k*, y*, i*, c*. At time t0, an imminent trade war makes people expect a higher inflation rate in the future. Higher inflation would benefit the borrower while hurt the lender. Therefore, rational people has less incentive to save. As a result, the saving rate s decreased to s'

(a) Draw the General Solow Diagram before t0. Label each curve as their associated function of kt.

(b) Locate the steady state of k*, y*, i*, c* on the Diagram.

(c) On the same diagram, draw the new curves after the shock occured at period t0. Label the new curves with a prime superscript on the top right corner.

(d) Locate the new steady state k*'

(e) Draw the time path of kt, yt, it, ct. (hint: there should be two cases for the time path of ct)

(f) Explain what is the golden saving rate, sgold in one sentence. Suppose s > s' > sgold, which of the two time path for ct you draw above is more likely to happen. What if s > sgold > s' and sgold > s > s' ?

(g) (Open Question) Do you think the saving rate in US is above or below the sgold? What is the reason causing the saving rate at such level? Could you make a policy proposal so that people could achieve a higher well-being by using General Solow Model to justify your argument.

Reference no: EM132200710

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