Question 1 According to the mm growth model [read the textbook pp. 118-122], the rate of growth of GDP is equal to the Savings Ratio
Question 1 According to the mm growth model [read the textbook pp. 118-122], the rate of growth of GDP is equal to the Savings Ratio (s) divided by the Incremental Capital Output Ratio (0) i.e. :1 = 5 [see Equation 3.7 on Page 120 of the textbook]. Use this information to answer the following questions: (i) In Indonesia during the 1970s the capital-output ratio (c) averaged 2.50. Using the mm growth equation, what saving rate would have been required for Indonesia to achieve an aggregate growth rate of 8 percent per year? (ii) With the same capital-output ratio, what growth target could be achieved with a saving rate of 27 percent? (iii) In order to increase the rate of growth of GDP what should happen to the savings ratio? What should happen to the capital output ratio? (iv) How can less developed countries increase their savings ratios? Explain. (v) The government of a poor less developed country fears that a political upheaval will occur unless the growth rate is at least 4 percent per annum. The capital output ratio and the saving rate are projected to be c: 5.0 and s : 14 percent, respectively. Show that 4 percent growth cannot be achieved under these circumstances
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