Will the saving rate rise over time or fall

Reference no: EM13186224

The economy of Sonrisa has 1000 people in three income categories: poor, middle class, and rich. The poor ear $500 per year and have to spend it all to meet their consumption needs. The middle class earn $2,000 per year, of which $1,500 is spent and the rest saved. The rich earn $10,000 per year, and consume 80% of it, saving the rest.

(a) Calculate the overall saving rate in Sonrisa if 20% of the people are poor and 50% are in the middle class.

(b) Suppose that all growth occurs by moving people from the poor category to the middle-class category (all poor people become middle-class people). Will the saving rate rise over time or fall?

Reference no: EM13186224

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