Unformatted text preview: ere S = national saving Y = GDP C = consumption G = government spending Saving Rate
Dividing both sides of the equation by the GDP in the long run (Y*), we get S C G = 1- - Y* Y* Y*
where S/Y* = national saving rate C/Y* = consumption G/Y* = government share of longrun GDP The Relationship Between Saving and Investment
To see the relationship between the national saving rate and the interest rate, we can rewrite the equation as C I G X 1= + + + Y* Y* Y* Y* S I X = + Y* Y* Y* The Relationship Between Saving and Investment
The national saving rate (S/Y) is positively related to the interest rate because a higher interest rate results in a decrease in consumption. I/Y and X/Y are negatively related to the interest rate. An increase in government or consumption purchases will decrease t...
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