Consider a nation with a low savings rate (on the basic Solow growth model graph
ID: 1118037 • Letter: C
Question
Consider a nation with a low savings rate (on the basic Solow growth model graph below). y=FIC) Le Le Note that in the steady-state equilibrium (at klor Yio. consumption per worker (C) is not at its maximum (that would beon the graph above), what are two ways that we could use macroeconomic policy to get consumption per worker up to that level over time? o (1) Decrease the top marginal tax rate on corporate income (to increase the demand for loanable funds (LF), or (2) increase personal income tax rates (which would decrease the federal budget defcit, thereby increasing the supply of LF - via increasing national savings (which is the sum of private savings and government savings). o (1) Increase the top marginal tax rate on corporate income (to decrease the demand for loanable funds (LF). or (2) increase personal income tax rates (which would decrease the federal budget deficit, thereby increasing the supply of LF - via increasing national savings (which is the sum of private savings and government 'savings O None of the other options. Decrease the top marginal tax rate on corporate income (to increase the demand for loanable funds (LF), or (2) decrease personal income tax rates (which would increase the federal budget deficit, thereby decreasing the supply of LF -via decreasing national savings (which is the sum of private savings and government 'savings). OIncrease the top marginal tax rate on corporate income (to decrease the demand for loanable funds (LF). or (2) decrease personal income tax rates (which would increase the federal budget deficit, thereby decreasing the supply of LF -via decreasing national savings (which is the sum of private savings and government savings).Explanation / Answer
When the consumption per worker is not at the golden state (or at the maximum level ) and below the maximum level then two ways thate we could use to get consumption per worker upto the maximum level over time are;
1. Decrease the top marginal tax rates on corporate income(to increase the demand for loanable funds (LF)or,
2. Increase the personal income tax rates (which would increase the federal budget deficit , theteby increasing the supply of loanable funds via- increasing national savings(which in turn is the sum o private savings + government savings).
Because by both ways the current consumption will reduce at that level but over time, it increases and reach to the maximum level.
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