In the neoclassical view of the macroeconomy, if there is not enough investment spending to use all available savings
A) the Federal Reserve will raise the interest rate.
B) the interest rate will fall.
C) excess savings will be hoarded.
D) excess savings will be used to pay taxes.

Question

Quizplus · Accepted Answer

In the neoclassical view, the interest rate is determined by the supply and demand for loanable funds. If there is excess savings, the supply of loanable funds will increase, causing the interest rate to fall. This will ultimately stimulate investment spending and bring the economy back into equilibrium. The Federal Reserve would only raise interest rates if there was an excessive increase in aggregate demand and inflationary pressures were building. Excess savings being hoarded or used to pay taxes are not likely outcomes in this scenario according to the neoclassical view.

In the Neoclassical View of the Macroeconomy, If There Is