User:Nick Gardner /Sandbox: Difference between revisions
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The model can be examined in words by supposing that there is a reduction in the public's propensity to save, meaning that people spend more of their money on "consumption goods". That would prompt an increase in the supply of those goods, in the total income of those employed in their production, and thus an increase in national income. | The way in which the model explains the tendency for the economy to settle down to an equilibrium following shock or a change in behaviour, can be examined in words by supposing that there is a reduction in the public's propensity to save, meaning that people spend more of their money on "consumption goods". That would prompt an increase in the supply of those goods, in the total income of those employed in their production, and thus an increase in national income. However, that increase in expenditure and income would mean that more of the available money would be used as "transactions balances" reducing the amount available for people to hold as cash reserves for speculative purposes. That would make people willing to pay more in interest to restore their speculative reserves and the resulting rise in interest rates would stimulate saving and discourage investment and so check the growth in income. | ||
Revision as of 03:58, 18 November 2009
The way in which the model explains the tendency for the economy to settle down to an equilibrium following shock or a change in behaviour, can be examined in words by supposing that there is a reduction in the public's propensity to save, meaning that people spend more of their money on "consumption goods". That would prompt an increase in the supply of those goods, in the total income of those employed in their production, and thus an increase in national income. However, that increase in expenditure and income would mean that more of the available money would be used as "transactions balances" reducing the amount available for people to hold as cash reserves for speculative purposes. That would make people willing to pay more in interest to restore their speculative reserves and the resulting rise in interest rates would stimulate saving and discourage investment and so check the growth in income.