Question

Assume a closed economy. In the long run, an increase in the saving rate Group of answer choices doesn’t change the level of productivity or income. raises the levels of both productivity and income. raises the level of productivity but not the level of income. raises the level of income but not the level of productivity.

Answer 1

Answer: Raises the levels of both productivity and income

Explanation:

In a closed Economy, there is no trade with the outside world.

That would mean that the GDP formula for their expenditure model will look like this,

Y = C + I + G

Where Y is (GDP)

C is consumption

I is investment and,

G is Government Spending

Investment is also known as Savings because it is the amount of Total income that is not spent after individuals CONSUME and the Government SPENDS,

I = Y - G - C.

When an economy SAVES MORE they are sacrificing consumption now for future consumption and saving more.

This means that there is more money to invest in Economic activities.

Since there is a higher Investment in Economic activities, we can expect higher CAPITAL STOCK which can drive Economic growth as it leads to greater productivity as well as greater income because the Economy is growing.

The Harrod-Domar model of economic growth speaks more on this.