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Does a higher rate of saving lead to higher growth temporarily or indefinitely?
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VerifiedThe problem is asking if higher rate of saving can lead to a temporary or indefinite increase in growth.
Accumulation of capital will act in such a way that the share capital will be growing in the short term. Then, the benefit diminishes, which means that there is a short-term growth due to higher savings.
An increase in the saving rate will lead to a rise in growth temporary.
The reason for that is diminishing returns. Over time, as growth increases, the diminishing returns will slow down growth whereas when we have a large number of capital quantities available, additional units of capital will increase production only slightly.
But, we must have in mind that an increased saving rate, will increase growth for a prolonged period of time, which can last for a couple of decades, thus above mentioned "temporary rise in growth" should not be considered in absolut terms.
We have to explain does a higher rate of saving leads to higher growth temporarily or regularly.
A higher rate of saving can lead to higher growth but only temporarily because an increase in savings is equal to a decrease in investment. This is because investments (I) are always equal to savings (S), meaning if you save (in the economy) without investing, it will reduce investments, which will automatically reduce economic activity.
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