Saving, Investment and Multiplier Effect

Saving and Investment

Saving and Investment are both flow concepts, saving being a withdrawal form the circular flow of income and investment being an injection.

Saving = disposable income minus spending.

Investment = spending on capital goods.

Saving is generally regarded as a good thing. However, in the short-run, an increase in saving can reduce investment, as saving reduces AD and therefore depress output and employment.

A rise in intrest rate would increase saving but decrease investment.

Factors that affect saving:

• Real disposable income = as RDI rises then consumers will not only save more but will save a higher proportion of their income. This increases their average propensity to save APS.
• The rate of intrest = A rise in the rate of interest gives people…