Suppose income (or more precisely the capital stock) must reach a critical threshold before households start savings a substantial constant proportion of their income. Suppose below that level, households save only a trivial portion of their income.
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This threshold could be determined by various factors such as the cost of living, household needs, or cultural factors. Show more…
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Consider the market for loanable funds, where the interest rate is flexible, but all other prices and income are fixed. Suppose that all of a sudden individual households decide to save a higher share of their income. We would expect:
Andrew D.
Suppose income (or more precisely the capital stock) must reach a critical threshold before households start savings a substantial constant proportion of their income. Suppose below that level, households save only a trivial portion of their income. i. Show graphically (graphing new additions to capital and depreciation on the same graph) how this can lead to two steady states? ii. What does this imply about the stability of income differences without foreign aid or a major technological transfer? Note models with one steady state tend to imply that all countries should converge to the same level of income over time? iii. Give two reasons that this pattern of savings could open up in a world economy where currently developed countries were able to save beyond the low steady state during their development but current poor countries cannot. That is, what has changed about the world economy since the currently wealth countries passed key milestones in their development?
If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?
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