Within the framework of the AD-AS model, an increase in savings by households will
A) increase the supply of loanable funds and reduce interest rates.
B) be offset by a decrease in savings by businesses.
C) cause long-run fluctuations in the rate of consumption.
D) result in a decline in aggregate demand, output, and employment.

Question

Quizplus · Accepted Answer

An increase in savings by households leads to an increase in the supply of loanable funds, which will reduce interest rates. This will result in an increase in investment, causing an increase in aggregate demand in the short run. However, in the long run, the increase in investment will lead to an increase in the economy's productive capacity, resulting in an increase in aggregate supply. Therefore, the short-run effect of an increase in savings by households is an increase in aggregate demand, while the long-run effect is an increase in aggregate supply.

Within the Framework of the AD-AS Model, an Increase in Savings