According to Neoclassical and Keynesian economics, what is the direction of causation between savings and investment,...

According to Neoclassical and Keynesian economics, what is the direction of causation between savings and investment, respectively?

Expert Solution

In Keynesian economics, it is argues that the causation is from Investment to Savings. A high level of investment increases price of capital goods. Hence this goods are allocated away from consumer good sector. This leads to rise in price of consumer goods relative to their wages. As a result the income share of workers rise less than that of proift earners. In general profit holders have higher mps's and hence there will be an increase in Savings. You can also think how keynasian school is a beleiver of demand side economics. Demand creates supply, Investment demand creates supply for investment.

While Neoclassical economies that causation is from Savings to Investment. The decison of consumers to save or not save decided the flow of capital. A higher savings, increases lonable funds quantity which allows for higher level on Investments. This school is based on the classical thought of supply creating demand, meaning saving creates investment.

Rahul Sunny answered 8 months ago

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