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The Saving – Investment Link. What May Cause a Recession in the Short Run will Definitely Enhance Economic Growth in the Long Run. AS-AD. LRAS. We begin with an economy at full employment. . SRAS. PL. AD. Loanable Funds Market. RGDP. Sfunds. Real i.r . Dfunds. Qfunds. AS-AD.

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The Saving – Investment Link

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The saving investment link

The Saving – Investment Link

What May Cause a Recession in the Short Run will Definitely Enhance Economic Growth in the Long Run


The saving investment link

AS-AD

LRAS

We begin with an economy at

full employment.

SRAS

PL

AD

Loanable Funds Market

RGDP

Sfunds

Reali.r.

Dfunds

Qfunds


The saving investment link

AS-AD

If people decide to save more,we see a short-run effect on both AD and interest rates.

S up  C down  AD down

S up  Sfunds up  real i.r. down

LRAS

SRAS

PL

AD

AD1

Loanable Funds Market

RGDP

Sfunds

Sfunds1

Reali.r.

Dfunds

Qfunds


The saving investment link

AS-AD

While I spending should rise, it probably won’t rise enough to make up for the decline in C, hence a recession in the short run.

BUT . . .

LRAS

SRAS

PL

AD

AD1

Loanable Funds Market

RGDP

Sfunds

Sfunds1

Reali.r.

Dfunds

Qfunds


The saving investment link

AS-AD

4. Lower interest rates WILL increase I spending some and, to that extent, the economy will experience faster economic growth in the Long Run. Remember: I spending is spending on machines and factories. The result? More RGDP per capita (bigger slices of pie)!!

LRAS

SRAS

faster

PL

AD

AD1

Loanable Funds Market

RGDP

Sfunds

Sfunds1

Reali.r.

Dfunds

Qfunds


The saving investment link

Here’s the whole walkthrough:

S up  C down AD down  Y down, PL down, unempl. Up

S up  Sfunds up  real i.r. down  I up . . . LRAS up faster (PPF out faster) in Long Run


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