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Keynes-Savings Equals Investment?
Keynes-Savings Equals Investment?
I know that Keynes says savings equals investment, and I think I understand that. I'm studying for a final and my professor wants to know why savings doesn't always equal investment. Any ideas? Thanks!
Answers:
Tyler: GDP= Consumption+ Investment+ Government expenditure+ Net exports
Say the fed were to lower the interest rate by x points. When drawing a money market diagram you will see that this will increase the money supply.(the fed will increase their money supply to meet their "target interest rate") This increase in money supply will result in more money in our pockets causing an increase in consumption and increase in investment. which will cause the GDP to grow.
now if the fed were to raise the interest rate, it would lower the amount of money in the economy which will result in less money in our pockets causing us to save more money. It will lower both consumption and investment which will decrease total GDP.
since our economy is largely based on speculation, consumers will save their money if they see our economy going into decline--falling GDP. A lot of times, investment and savings are inversely related. As one goes up, the other goes down--all depending on the current economic outlook.
2008-05-12 13:44:27
Say the fed were to lower the interest rate by x points. When drawing a money market diagram you will see that this will increase the money supply.(the fed will increase their money supply to meet their "target interest rate") This increase in money supply will result in more money in our pockets causing an increase in consumption and increase in investment. which will cause the GDP to grow.
now if the fed were to raise the interest rate, it would lower the amount of money in the economy which will result in less money in our pockets causing us to save more money. It will lower both consumption and investment which will decrease total GDP.
since our economy is largely based on speculation, consumers will save their money if they see our economy going into decline--falling GDP. A lot of times, investment and savings are inversely related. As one goes up, the other goes down--all depending on the current economic outlook.
2008-05-12 13:44:27
Chosen Answer
Giorgos K: Increased saving does not always correspond to increased investment, if savings are stashed in a mattress or otherwise not deposited into a financial intermediary like a bank there is no chance for those savings to be recycled as investment by business. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a recession) rather than to economic growth. In the short term, if saving falls below investment, it can lead to a growth of aggregate demand and an economic boom. In the long term if saving falls below investment it eventually reduces investment and detracts from future growth.
Reasons why this might happen: Investment is more about predictions: if firms predict that economy will expand (due to macrooeconomic measures and since the prediction is being made by take into account some indicators, usually leading indicators, etc.), then they will need more money than the amount of households' saving. The opposite if firms would predict a recession.
I hope this helps.
2008-05-13 07:27:37
Giorgos K: Increased saving does not always correspond to increased investment, if savings are stashed in a mattress or otherwise not deposited into a financial intermediary like a bank there is no chance for those savings to be recycled as investment by business. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a recession) rather than to economic growth. In the short term, if saving falls below investment, it can lead to a growth of aggregate demand and an economic boom. In the long term if saving falls below investment it eventually reduces investment and detracts from future growth.
Reasons why this might happen: Investment is more about predictions: if firms predict that economy will expand (due to macrooeconomic measures and since the prediction is being made by take into account some indicators, usually leading indicators, etc.), then they will need more money than the amount of households' saving. The opposite if firms would predict a recession.
I hope this helps.
2008-05-13 07:27:37