Determination of Saving and Investment at Full Employment

We need to go beyond the identities to understand the mechanism by which saving and investment are equalized in the open economy. The equilibration of. saving and investment in the, short run jurist the mirror Image of the multiplier mechanism shown in Figure 30-2.

It is useful to consider how saving and investment . are allocated in the long run in a “classical” economy. wit full employment and flexible prices. We consider the Simplest case where there is no inflation or uncertainty. We begin with a closed economy and then extend the analysis to an open economy.

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