In Chapter 3 we saw that an increase in the saving rate can lead to a recession in the short run (i.e., the paradox of saving). We examined the issue in the medium run in Problem 5 at at the end of Chapter 7. We can now examine the long-run effects of an increase in saving.

Using the model presented in this chapter, what is the effect of an increase in the saving rate on output per worker likely to be after one decade? After five decades?