The factor that makes national saving equal investment, in equilibrium, is:
A) the interest rate.
B) private saving.
C) public saving.
D) fiscal policy.

Question

Quizplus · Accepted Answer

In a closed economy, national saving (S) is equal to investment (I) at the equilibrium level of interest rate. This is because the interest rate adjusts to balance the supply and demand for loanable funds. If national saving is greater than investment, there will be excess supply of loanable funds which will drive down the interest rate, making investment more attractive and S will decrease until it equals I. Similarly, if I is greater than S, there will be excess demand for loanable funds, which will drive up the interest rate, making saving more attractive and I will decrease until it equals S. Therefore, the interest rate is the factor that equates national saving and investment in equilibrium.

The Factor That Makes National Saving Equal Investment, in Equilibrium