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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

According to Keynes, an increase in saving and a decrease in consumption may lower total spending in the economy. But how could that happen if the increased saving lowers interest rates (as shown in the last chapter)? Wouldn’t a decrease in interest rates increase investment spending, thus counteracting the decrease in consumption spending?

To determine

The impact of increased savings and decreased interest rate on the economy.

Explanation

The savings and the consumption are the two options that the households are having with their income. The households can either save their disposable income or consume as a consumer. Thus, as savings increases, the consumption would decrease and vice versa. As the savings increases, it increases the lonable funds in the market which cause a reduction in the interest rate of the economy.

The interest rate and investment are inversely correlated which means that as the interest rate increases, the investment decreases and vice versa...

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