Define saving and investment Equilibrium conditions and write down the implications of the conditions. explain elaborately.

Expert Solution

1. Savings should be equal to Investment - Classical economists believe that interest rate brings the equality between savings and investment. If there is excess of saving then interest rate will fall down thereby increasing investment and dropping in savings till the point of equilibrium is achieved. Same way if savings are less then interest rate will move up so as to increase savings till the equilibrium point is achieved.

This means that economy will operate at full employment levels. However this idea got rejected later.

2. 2 sector model in economy is assumed: Only households are producers are there. Aggregate expenditure will depend upon (Consumption + Investment) and national income equals (Saving + Consumption). Therefore Savings will be equal to Investment.

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Rahul Sunny answered 2 months ago

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