The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve
A)raises the profitability of investment for firms.
B)causes the amount of firms' investment to increase.
C)increases the total amount of saving because of the increase in the real interest rate.
D)causes the total amounts of saving and investment to fall.

Question

Quizplus · Accepted Answer

A leftward shift of the saving curve implies that for any given interest rate, there is less saving available. This typically leads to a higher equilibrium interest rate, which makes borrowing more expensive. As a result, firms are likely to invest less because the cost of financing investment has increased. Additionally, the higher interest rate discourages some saving, leading to a decrease in both saving and investment in the economy.

The Saving-Investment Diagram Shows That a Higher Real Interest Rate