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In the Solow model, what happens if saving per worker initially exceeds investment per worker?

A. The capital per worker will increase.
B. The capital per worker will decrease.
C. The capital per worker will remain the same.
D. The capital per worker will fluctuate.

Answer :

Final answer:

In the Solow model, if saving per worker exceeds investment per worker, capital per worker will increase due to the automatic channeling of excess savings into investment, leading to an accumulation of capital. Thus, the option A. The capital per worker will increase is the correct answer.

Explanation:

In the Solow model, if saving per worker initially exceeds investment per worker, the outcome would be that capital per worker will increase. This is because in the Solow growth model, savings are assumed to equal investment, which means that any excess saving is automatically channeled into investment. Therefore, when saving per worker is higher than investment per worker, it leads to an accumulation of capital per worker over time. The Solow model illustrates how economies converge to a steady-state equilibrium where the rate of investment matches the rate of savings, and at this point, capital per worker stabilizes. However, prior to reaching this equilibrium, any excess of saving over investment contributes to the growth of the capital stock, enhancing the economy's productive capacity and potentially leading to higher output per worker. Thus, the option A. The capital per worker will increase is the correct answer.

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