Question

2. Classical economists and interest rate flexibility According to Say's law, funds (money) saved must give rise to an equal amount of funds (money) invested. The following graph shows the saving curve (S) and the investment curve (I) for a small economy. Show the effect of an increase in total saving at any interest rate in this economy, which behaves according to the classical view, by dragging one or both of the curves. Note: Tooltip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther. The Classical View of the Credit Market 60 - INTEREST RATE DOLLARS SAVED OR INVESTED The following table shows data for the economy before the increase in saving. Suppose that the increase in saving causes consumption to fall from $400 million to $350 million. Assume Say's law holds in this economy. Fill in the data for the economy after the increase in saving. Before Saving Increase $400 million $50 million Consumption (C) Investment (I) Government Purchases (G) Exports (EX) Imports (IM) After Saving Increase $350 million million million $800 million $700 million $200 million $800 million $700 million As a result of the increase in total saving, total expenditures will Grade It Now Save & Continue Continue without saving

Answer 1

As per Say's Law, money saved would be invested in the economy.

A rise in savings will shifts the savings curve to its right while investment curve would be same causing interest to fall in the economy from i* to i1.

Interest Rater Savings / Investment

As Income = Consumption + Saving

If consumption falls by $50, savings will rise by $50 which will cause same rise in investment level which cause investment to rise from $50 to $100.

#	Before Saving Increase	After Saving Increase
Consumption	400	350
Investment	50	100
Government Purchases	200	200
Exports	800	800
Imports	700	700
Total Expenditure	2150	2150

Total expenditure in an economy would be same.