Answer to Question #50885 in Macroeconomics for Yoyo

Question

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. It is the explanation that is important.

In an aggregate expenditure model with no government or foreign sectors, represented by C = a + bY and I (an autonomous amount), saving equals investment.

Answer 1

The savings-investment identity is a concept in national income accounting stating that the amount saved in an economy will be the amount invested in new physical machinery, new inventories, etc. More specifically, in an open economy (an economy with foreign trade and capital flows), private saving plus governmental saving (the government budget surplus or the negative of the deficit) plus foreign investment domestically (capital inflows from abroad) must equal private physical investment in new machinery, inventory build-up, etc.
So, in an aggregate expenditure model with no government or foreign sectors, represented by C = a + bY and I (an autonomous amount), saving equals investment.
That's why the statement is True.