Answer to Question #310921 in Microeconomics for isay

Question

Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch?

Answer 1

Their will be growth in productivity because an increase in factories implies that more people are needed as workers to carry out production. Therefore, an additional number of factories leads to additional number of units being produced from the factories. The society benefits from high productivity in that it leads to reduction of prices of commodities since the supply is higher than demand. Moreover, it provides opportunities for people to have jobs in the factories, which increases the consumption income of people. This leads to more products being demanded resulting in a general increase in the quantity demanded for a product. However, the quantity demanded will not increase by the same margin as the quantity supplied since factories produce more than the consumers can purchase. Therefore, both the government and the citizens benefit from the productivity where the government will have an increase in GDP and revenues while the citizens will experience a drop of prices of the goods and services.