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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?

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?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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b. Consider a fixed exchange rate regime. How does higher government expenditure affect output and interest rate in equilibrium? Discuss with the help of the diagram above (e.g., show what curves will shift, label curves and axes correctly). 

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 + I(r) MPS₁ abT+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?
Transcribed Image Text: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 + I(r) MPS₁ abT+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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