Suppose in the Solow growth model that F(K,N)=K^aN^1a, where 0

, determine what happens to the shares of aggregate income held bynon-savers and by savers.

Given theCobb-Douglas productionfunction, the capital share of aggregate income is alwaysa, and the labour share of aggregate income is always 1a. If Y is aggregateincome, then thesaver's income is

(1a)Y/2,

(Y/N)(1a),

aY,

(Y/N)(1+a),

and thenon-saver's income is

aY.

(1a)Y/2.

(Y/N)(1a)

(Y/N)(1+a).

Savings cause thecapital/worker ratio to

rise

fall

stay the same

which causes real wages to

rise.

fall.

stay the same.

So the savers receive

a larger share

a smaller share

the same share

of aggregate income as thenon-savers, and over time this share

increases.

decreases.

does not change.