Re: ISI 2017 key

Posted by ColtraneBlues on May 22, 2017; 2:06pm
URL: http://discussion-forum.276.s1.nabble.com/ISI-2017-key-tp7604137p7604595.html

You can't conclude from this graph that Savings will increase when interest rates fall (there are other macroeconomic models and studies that make that claim, but I highly doubt ISI would expect us to know those).
Savings is exogenous in this graph. All a fall in interest rate will do- post the equilibrium level- is create surplus demand for loanable funds.

Using the national income identity would overly simplify the matter- it won't be able to capture the net effect of fiscal and monetary expansion that the IS-LM model does.
Essentially, savings depend inversely on the Marginal Propensity to Consume- or directly on the marginal propensity to save. When interest rates rise, people want to consume less and save more- and this is exactly how the IS-LM model describes the money market (the LM side of the model) to work.