What ensures the equality of savings and investment,according to neoclassical theory?
A)Flexible prices
B)Flexible interest rates
C)Flexible wages
D)Say's Law

Question

Quizplus · Accepted Answer

According to neoclassical theory, flexible interest rates ensure the equality of savings and investment. When there is excess savings i.e. when people save more than what they are willing to invest, interest rates decrease which stimulates investment and reduces savings. Conversely, when there is excess investment i.e. when people are willing to invest more than what is being saved, interest rates increase which reduces investment and stimulates savings. Therefore, flexible interest rates act as an automatic adjustment mechanism that ensures the equality of savings and investment.

What Ensures the Equality of Savings and Investment,according to Neoclassical