Answer to Question #281806 in Macroeconomics for sonu

Question

Explain how investment(I) in the economy is supported from saving(S) by (i) the private sector (ii) government sector and (iii) current account balance

Answer 1

(i)

Private sector

Comprises mainly of household whose savings are in the form of bank deposits. Credit institutions thus tailor their deposit policy for acquiring finances from non banking entities and to provide the private sector with loans that are required for investment activities.

(ii)

In the government sector, the employment of monetary policy encourages investment by decreasing interest rates and encouraging savings by borrowing them. The government offers exemption from savings taxes to encourage savings, and also tax breaks to industries in which investments are being encouraged.

(iii)

A current account deficit reflects a government and an economy that is a net debtor to the rest of the world. It is saving less than it is investing and it is using resources from other economies to meet its domestic investment and consumption requirement.