Saving Investment

Topics: Inflation, Central bank, Money supply Pages: 4 (1195 words) Published: March 12, 2014
Kristine R. Leomo 3 BSACT
ECO AO3 Prof: Maylene P. Paniza
Saving-Investment Equilibrium
Y = C + I
Y – C = I
S = I
Saving is an outflow which gradually reduces the additional income that it generates. Therefore the circular flow model tells us that outflows like savings, taxes, and import expenditures must go back in the system in the form of investment, government expenditures, and export earnings. The saving-investment equilibrium further implies that increasing, decreasing or maintaining the level of investment expenditure will respectively increase, decrease, or maintain the level of income and savings assuming all other factors remain constant. Hence, investment expenditures are equal to savings at any income level. Determinants of Savings

Price Level
Population Growth
Interest Rate
Investment Demand Determinants
Interest Rate – it is the particular amount of interest which a household or business is required to pay to a lender for borrowing a particular sum of money to finance spending on consumption and investment.
The figure shows the investment demand curve, which illustrates the inverse relationship between interest rate and level of investment. Thus, if interest rate will increase from 6 to 8, the demand of investment will decrease from B to A.

The Acceleration Principle
The principle states that the level of investment is a function of desired changes in output.

The figure on Panel (a) illustrates the acceleration principle which states that “the level of investment is a function of desired changes in output thus, causing the investment demand curve to shift outward.”

It is the introduction of an unfamiliar product and untested technology; opening a country’s product to markets and sources of raw materials not previously encountered; and the setting up of a new...
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