Unformatted text preview: In order to understand how increasing the spending on capital works, it is necessary to understand how money is spent on capital. In order for most firms to increase their capital stock, they must purchase additional machinery, tools, and education for their employees. Because firms do not often have the large sums of cash necessary for these types of purchases readily available, they must go to banks to get funding for their capital expenditures. Remember that when banks make loans, they are simply matching up savers and borrowers. Thus, the amount of savings by individuals directly affects the amount of money available for capital expenditures by firms. In this way, the savings rate in a country is the single most important determinant of the expenditures made by firms on capital. How much money should be saved in an economy and how much should be invested in...
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.
- Fall '10