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Iy and xy are negatively related to the interest rate

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Unformatted text preview: he national saving rate and shift the S/Y line to the left. The equilibrium interest rate will increase, resulting in a decrease in the investment and net exports spending shares of GDP. Determining the Interest Rate Using the Saving Rate Relationship The Effect of a Downward Shift in the Saving Rate The Relationship Between Saving and Investment Recall from Chapter 6: S= (Y C T) + (T G) S = Private Saving + Government Saving Using what we have learned in this chapter, we get I X = + Y* Y* Private Saving + Government Saving The Relationship Between Saving and Investment If budget deficits increase, then one or more of the following must occur: 1. Consumption must decrease (C/Y decreases), or 2. Investment spending must decrease (I/Y decreases), or 3. The trade balance must worsen (X/Y decreases). Key Terms consumption share investment share net exports share government purchases share exchange rate equilibrium interest rate crowding out national saving rate...
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