A Rise in National Saving

A Rise in National Saving, step by step

1. 1

   Start at Equilibrium

   The loanable funds market begins in equilibrium where the supply of saving meets investment demand. The intersection pins down the real interest rate and the quantity of funds.

2. 2

   National Saving Increases

   Households save a larger share of income, or the government moves toward surplus, so more funds are available to lend. The supply of loanable funds shifts right.

3. 3

   Rate Falls, Investment Rises

   The greater supply of funds pushes the equilibrium down along the demand curve. The real interest rate falls and the quantity of funds borrowed rises, so cheaper borrowing raises private investment. This is a movement along demand, not a shift in investment demand.

Where it ends up

An increase in national saving lowers the real interest rate and increases the equilibrium quantity of funds, raising private investment.

Now draw it yourself

Same graph, graded on whether you move the right curve and leave the rest alone.

• Financing the Deficit →
• Household Saving Behavior →
• Investment Tax Credit →

More Loanable Funds Market walkthroughs

• Crowding Out: Government Deficit Borrowing →