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# Solow growth: Compute the current US investment rate (I/Y)

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After reviewing the latest gures of investment rates for China and US, the
US Government is considering a scal policy manoeuver to increase investment
rate in US. In this question you are asked to use the Solow model to evaluate
the impact of this policy change. For simplicity assume that the US is a closed
economy so that
Y = C + G + I
where Y is GDP, C is private consumption, G is government consumption and I
is investment. Assume that the government currently taxes GDP at a 20% rate
and all tax revenues go to nance government consumption expenditures, which
are equal to 20% of GDP (so that G = 0:2Y ). The private sector consumes 80%
of after-tax GDP ((1-0.2)Y).
a) Compute the current US investment rate (I/Y)

https://brainmass.com/economics/personal-finance-savings/solow-growth-compute-current-usa-investment-rate-358871

## SOLUTION This solution is FREE courtesy of BrainMass!

After reviewing the latest figures of investment rates for China and US, the US Government is considering a fiscal policy maneuver to increase investment rate in US. In this question you are asked to use the Solow model to evaluate the impact of this policy change. For simplicity assume that the US is a closed economy so that Y = C + G + I
where Y is GDP, C is private consumption, G is government consumption and I is investment. Assume that the government currently taxes GDP at a 20% rate and all tax revenues go to finance government consumption expenditures, which
are equal to 20% of GDP (so that G = 0:2Y ). The private sector consumes 80% of after-tax GDP ((1-0.2)Y).
a) Compute the current US investment rate (I/Y)

Y = C + G + I
I = Y - C - G
Now, G = 0.2Y and C = 80% of 0.8Y = 0.8 * 0.8Y = 0.64Y
I = Y - 0.64Y - 0.2Y = 0.16Y
 I/Y = 0.16 or 16%

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!