Aggregate saving, represented by the curve S , is an upward-sloping function of the interest rate; as the interest rate rises, the economy tends to save more. Aggregate investment, represented by the curve I , is a downward-sloping function of the interest rate; as the interest rate rises, the cost of borrowing increases and investment expenditures decline. Initially, aggregate saving and investment are equivalent at the interest rate, i. If aggregate saving were to increase, causing the S curve to shift to the right to S , then at the same interest rate ′ i , a gap emerges between investment and savings. Aggregate investment will be lower than aggregate saving, implying that equilibrium real GDP will be below its natural level. Flexible interest rates, wages, and prices. Classical economists believe that under these circumstances, the interest rate will
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This note was uploaded on 11/18/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.