If the real interest rate increased while both desired saving amount and desired investment amount increased,...

If the real interest rate increased while both desired saving amount and desired investment amount increased, then

	both saving curve and investement curve shifted left
	saving curve shifted right and investment curve shifted left
	Saving curve shifted left
	neither curve shifts
	investment curve shifted right

Expert Solution

Saving curve shifted right and investment curve shifted left.

The rising real interest rate will increase the national savings of the economy. Thus the investment will fall down and the existing production will reduce with respect to the earlier level. Both investment and interest rate shows negative relationship. Thus the increasing real interest rate will reduce investment rate and enhance the level of savings. In an IS LM framework, the increasing interest rate will increase the cost of borrowing and reduce the level of disposable income. This higher real interest rate reduces inflationary pressures in the economy and leads to the appreciation of the exchange rate. Thus the banks make fewer loans under this high interest rate. The increasing cost of borrowing will affect the existing level of investment. Here the savings curve will shift to right side and the investment curve will shift to left due to the rise in interest rate. Both savings and investment will not shift to left together. Savings and investment are inversely correlated. Savings will shift left because of the fall in real interest rate. The falling interest rate will shift the investment curve to right.

Rahul Sunny answered 1 year ago

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