Answer to Question #210793 in Macroeconomics for Sahej

Question

Suppose there is increase in government budget surplus and businesses expect future profits to increase. Use a national savings and Investment demand curve to show how the real interest rate and national savings will ne affected.

Answer 1

The national savings will automatically reduce since the amount of national savings will be shifted towards the budget sector hence reducing the amount of national savings. Investment in general are based on expecting future profits. Therefore, when the business expects future profits, this is an indication on increase in real investment rate, as the businesses are considered to be more investment.

An increase in investment shifts investment demand curve towards the right by amount similar to multiplier times the investment change.