Bonus. .The IS-LM model suggests that savings reduces output in the economy. We can show this by noting that 1 - c = MPS and that If MPS₁ MPS₂ then Y₁ > Y₂ where Y₁ a-bT+G+1(r) MPS₁ a - bT + G +1(r) MPS₂ That is, the higher the amount households save, the lower the output in the economy. However, the Solow-Growth Model says otherwise-that higher savings rate results in higher income and income per capita. Question: Explain why the two models result in different conclusions about the impact of savings in the economy. Is there an inconsistency? Which one is correct?

Bonus. .The IS-LM model suggests that savings reduces output in the economy. We can show this by noting that 1 - c = MPS and that If MPS₁ MPS₂ then Y₁ > Y₂ where Y₁ a-bT+G+1(r) MPS₁ a - bT + G +1(r) MPS₂ That is, the higher the amount households save, the lower the output in the economy. However, the Solow-Growth Model says otherwise-that higher savings rate results in higher income and income per capita. Question: Explain why the two models result in different conclusions about the impact of savings in the economy. Is there an inconsistency? Which one is correct?

Macroeconomics: Principles and Policy (MindTap Course List)

13th Edition

ISBN:9781305280601

Author:William J. Baumol, Alan S. Blinder

Publisher:William J. Baumol, Alan S. Blinder

Chapter8: Aggregate Demand And The Powerful Consumer

Section: Chapter Questions

Problem 8DQ

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Question

Bonus.
. The IS-LM model suggests that savings reduces output in the economy.
We can show this by noting that 1-c = MPS and that
If MPS₁ < MPS₂ then
where
Y₁
Y₂
Y₁ > Y₂
abT+G+1(r)
MPS₁
a-bT+G+I(r)
MPS₂
That is, the higher the amount households save, the lower the output in the economy.
However, the Solow-Growth Model says otherwise-that higher savings rate results in
higher income and income per capita.
Question: Explain why the two models result in different conclusions about the impact of
savings in the economy. Is there an inconsistency? Which one is correct?

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