Question

3. The essay "Time and mOney: Universal of Macro Theorizing," by economist Roger Garrison, discusses the concept of the connection between savings and investment as either a "broken joint,loose joint or tight joint."

What does he mean by this with respect to interest rates mechanism and 3 big schools of macro thought? [At least 10 sentences]

Answer 1

Savings and investment represent two major macroeconomic concepts that gives an idea of working of an economy. When investments are larger than planned savings, the level of income is expected to raise. At increased levels of income, savings are expected to raise and reaches a stage when the intended savings becomes equal to the intended investment. When the savings are larger than the planned investment, then the level of income are expected to fall. This relation between savings and investment can be analysed based on three major schools of macroeconomic thought.

Keynesian school of thought

· Keynesian school believed that the demand should be boosted so as to boost the growth. Thus he believed that consumer demand is the major driving force in an economy.

· In real Keynesian argument, the economy is said to be in equilibrium when the savings and investment are equal. Thus he believed in equal savings and investment in an economy.

· Thus Keynesian school of thought believed in the tighter bond between savings and investment.

Friedman’s Theory

· Friedman stated that the consumption in an economy would be based on the permanent income levels and not on the current income levels.

· Thus, by this school of thought it is believed that the savings are not influenced by the current income levels and thus investments and savings would not be tightly bonded to each other.

· This school of thought believed in free market mechanism and hence had focus on increased profits rather than investment-savings equilibrium

Fisherian theory or Monetarism

· Monetarism believes that people would have more intend to save when the interest rates are increased and vice versa.

· Here, the investment and savings are having less joint and thus savings are more dependent on the interest rate mechanism of the economy

                                              The analysis of three major schools of thought are given above. Thus, on the analysis of the investment-savings pattern in these three schools of thought, we can see the three different patterns of relationships between the interest and saving patterns in the economy.