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They each earn income (Y); they each spend and consume (C ); they each save (S).

They each earn income (Y); they each spend and consume (C ); they each save (S). In a wholly Private Economy, Saving and Investment are Brought into Balance with an Interest Rate of, say, 5%. Rate of Interest. S. 5%. D. Loanable Funds. $800.

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They each earn income (Y); they each spend and consume (C ); they each save (S).

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  1. They each earn income (Y); they each spend and consume (C); they each save (S).

  2. In a wholly Private Economy, Saving and Investment are Brought into Balance with an Interest Rate of, say, 5%. Rate of Interest S 5% D Loanable Funds $800 Net Saving by Bob, Carol, Ted, and Alice is $800. Borrowing and Investing by the Business Community is $800.

  3. Suppose that, with the Interest Rate Still at 5%, Bob and Carol decide they’d like to save more. Rate of Interest S S surplus 5% D Loanable Funds $800 $1,000 Now, net Saving by Bob, Carol, Ted, and Alice is $1,000. But Borrowing and Investing is still $800.

  4. With a Surplus of Loanable Funds, the Interest Rate falls to 3%, So, Bob, Carol, Ted, and Alice all make adjustments. Rate of Interest S S surplus 5% 3% D Loanable Funds $800 $910 $1,000 Now, net Saving by Bob, Carol, Ted, and Alice is $910. And Borrowing and Investing is also $910.

  5. This is the market at work for you and for me. When people save more (i.e., when they consume less), the interest rate falls. The business community responds by borrowing more funds and using them to expand the economy’s productive capacity. Resources freed up by the reduced consumption are used for creating plant and equipment and engaging in longer-term production activities. Saving also means increased buying power in the future---when the expanded investment activities have come to fruition. Rate of Interest S S 5% 3% D Loanable Funds $800 $910 $1,000

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