The paper "The Concepts of Aggregate Demand and Supply " is an outstanding example of a micro and macroeconomic assignment. The Solow model indicates that the y=k=n, in a steady-state. Besides, the Solow model indicates that the levels of output per person and capital per person rely on saving rate. However, saving rates does not affect the economic growth rate. The actual problem of those people who long to enhance more saving is that the current low saving predicts that the living standard in the future is anticipated to be lower if people save at the present moment.
Policies to decrease the federal budget deficit may be implemented to encourage saving rate through rewarding savings of households such as offering tax incentives or embarking to a consumption tax for saving (Burda & Wyplosz 2012). The variation in economic growth is brought by the fluctuations in population growth. If fluctuations in population growth are not consistent with output per person, very few individuals will care as the average standard of people’ s living remain unchanged. However, when there is a speed-up or slowdown in output per person, economists, policymakers and the public become interested in those changes.
Therefore, when the economy is in the steady-state, capital input, labour input and output are in identical growth rates (Agarwal 2010). In Solow’ s model, there is an automatic adjustment of the economy in accordance with steady-state output per person (Y/N) AND capital per person (K/N). This automatic adjustment happens when the levels of investment and saving per person does not match with the steady-state investment level per person as may be needed to substitute old capital with new capital to maintain K/N constant given that the growth of the labour force exists.
An increase in capital per person increases the steady-state investment needed. Investment per person depends on the extent of saving per person. The amount of saving per person relies on the output per person (Agarwal 2010).
Burda, M. C., & Wyplosz, C. (2012). Macroeconomics. Oxford [u.a.: Oxford Univ. Press.
Agarwal, V. (2010). Macroeconomics: Theory and policy. New Delhi: Dorling Kindersley.
Wang, P. (2009). The economics of foreign exchange and global finance. Berlin: Springer-Verlag.
Hein, E., & Stockhammer, E. (2011). A Modern Guide to Keynesian Macroeconomics and Economic Policies. Cheltenham: Edward Elgar Pub.
Young, W., & Zilberfarb, B. (2000). IS-LM and modern macroeconomics. Boston, Mass.; London: Kluwer Academic Publishers.