According to the classical model, more saving leads to more investment because
A) the people who save are the same people who invest.
B) the interest rate adjusts to keep investment equal to saving.
C) saving and investment are two sides of the same activity.
D) the interest rate is set by the federal government.

Question

Quizplus · Accepted Answer

The classical model assumes that the interest rate adjusts to balance the supply and demand for loanable funds. When people save more, the supply of loanable funds increases, driving down the interest rate. This lower interest rate then stimulates more investment, which increases economic growth in the long run. Therefore, more saving leads to more investment through the interest rate adjustment mechanism.

According to the Classical Model, More Saving Leads to More