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: Tool tip: 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 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 $200 million $800 million $700 million After Saving Increase $350 million Consumption (C) Investment (I) Governent Purchases (G) Exports (Ex) Imports (IM) million million $800 million $700 million As a result of the increase in total saving, total expenditures will

Answer 1

According to Classical view, increase in amount of savings brings equal increase in amount of investment. So, increase in total savings will bring an equal increase in total investment. Due to this, both savings curve and investment curve will shift rightward in equal proportion. Following is the required figure -

Due to increase in savings, consumption has decreased from $320 million to $280 million. This decrease in consumption by $40 million indicates increase in savings by $40 million. As Say's Law hold in this economy, this increase in savings by $40 million will bring an equivalent increase of S40 million in investment as well. Complete table is as follows- Segerts So, As a resuit of the increase in total saving, total expenditures will remain same