Figure 10-5

-In Figure 10-5 above,suppose that the economy's steady-state point is C.At points to the left of this,steady-state investment ________ national saving,moving the economy ________ point C.

Question

Figure 10-5
 
-In Figure 10-5 above,suppose that the economy's steady-state point is C.At points to the left of this,steady-state investment ________ national saving,moving the economy ________ point C.

Quizplus · Accepted Answer

In a closed economy, the national saving (S) and investment (I) must be equal in the long run steady state. Any point to the left of the steady-state point (C) will have higher investment than national saving; therefore, investment will fall short of national saving. The economy will be investing more than it is saving, causing the capital stock to increase, which will drive up the marginal product of capital and the real interest rate. As a result, households will save more and firms will invest less, moving the economy closer to the steady-state point (C), which has equality between saving and investment. Therefore, as we move to the left of the steady-state point, investment falls short of national saving, moving the economy closer to point C.

Figure 10-5 -In Figure 10-5 Above,suppose That the Economy's Steady-State Point Is