A decrease in investment demand:
A) results in the same equilibrium as an increase in savings.
B) decreases both the amount saved and the interest rate.
C) increases the amount saved but decreases the interest rate.
D) increases the supply of savings.

Question

Quizplus · Accepted Answer

Investment demand and savings are complementary choices that affect the interest rate. A decrease in investment demand decreases the demand for loanable funds, which in turn lowers the interest rate. As a result, households and firms save less because of a reduced incentive to save. Therefore, a decrease in investment demand decreases both the amount saved and the interest rate.

A Decrease in Investment Demand