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Answer the following questions using the basic Solow growth model, without population growth or
(a) Draw a diagram with per worker output, y, consumption, c, saving, s and investment, i, on the
vertical axis and capital per worker, k, on the horizontal condition. On this diagram, clearly
indicate steady-state values for c, i, and y. Brie
y outline the condition that holds in the steady-
state (i.e. what is the relationship between investment and the depreciation of capital?).
(b) Suppose that society becomes less thrifty, resulting in a lower rate of savings, s. Using the above
diagram, how does the new steady-state capital stock per worker, k, compare to the stock in part
(a)? How does output per worker compare? How does consumption per worker compare? [Note:
Even if output per worker decreases, consumption per worker need not decrease. Why not?]
(c) Suppose that the saving rate decreases at time t0. On a graph plot c, k, and i against t and show
how the economy adjusts between the original and the new steady-state. Brie
y explain why each
variable is changing in the way that you have drawn it in your diagram.
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