Saving, Investment and Multiplier Effect

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  • Created by: Ben
  • Created on: 12-05-13 11:10

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


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