Question

A closed economy was observed in two different years to be operating with levels of output at:(a) aggregate supply was equal aggregate demand for goods and services but planned domestic investment was greater than planned domestic saving ( b) aggregate supply was equal aggregate demand for goods and service but planned domestic investment was less than planned domestic saving. Use a diagram to explain the forces that would move the economy towards a stable equilibrium in each case.

Answer 1

For a closed economy, savings are balanced with

investment, with investment (I) depending on the interest rate r, and

savings (S) depending on income (Y) (within the Keynesian school):

In the neoclassical school, as opposed to the Keynesian school,

the equality of savings and investments is achieved in the financial market

by changing only the in.