What happens to the capital stock when the saving rate increases?

When the saving rate increases in an economy, more resources are being set aside for the production of capital goods rather than being consumed. This scenario leads to an increase in investment in capital, which causes the capital stock to rise.

As investments are made in capital, the economy experiences growth in its capital stock, which is critical for increasing potential output. This process continues until the economy reaches a new steady state. In this new steady state, the level of capital per worker stabilizes as the additional savings are balanced by depreciation and the impact of population growth.

In the long run, a higher saving rate translates to a larger capital stock, enhancing productivity and allowing for greater output per worker. Therefore, the capital stock will experience an increase until it settles at this new long-run trajectory following the increase in the saving rate.