Question

1. What is the relationship between savings and investment in a closed economy?

Answer 1

Saving is source of supply of loanable fund, so with the increase in the saving, the supply of the loanable fund increase, so supply curve of loanable fund shifts rightward. Hence interest rate decrease. Vice-versa in case of decrease in the saving.

Since interest rate is the cost of borrowing for investment for machinary and plants. So with the increase in the interest rate cost of borrowing increases, therefore capital investment becomes expensive. Hence investment decreases and vice-versa in case of an increase in the interest rate.