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OUTPUT DETERMINATION WITH SAVING AND INVESTMENT

We first show how investment and saving are equilateral in the multiplier model for a highly simplified economy.·Re call Chapter 22’s picture of the national consumption and saving functions these are redrawn ‘in Figure 24-1.1 Each point on the consumption function shows desired or planned consumption at that level of disposable income. Each point on the saving schedule shows ,desired or planned saving at Natalia income level. The two schedules are closely related: Since C + S always equals disposable income,. the consumption and saving curves are mirror twins that will always add up to the 45° line. We also carry over the schedule Figure 24-2 on page 493.

We have seen that investment are dependent on quite different saving depends primarily on disposable income, while investment depends on factors such as output, interest rates, tax policy, and business confidence. For simplicity here, we treat investment as an variable, one whose level is determined outside the model , Say that investment opportunities. are such that investment would be exactly \$200 billion per year regardless of the level of COP. This means that if we schedule of investment against GDP, it will have to be a horizontal line. The case of exogenous investment is shown in Figure 24-2, where the investment schedule is labeled II to ,distinguish it from the saving schedule. (Note that II does not mean Roman numeral 2.) • The saving and investment schedules’ intersect at point E in Figure 24-2. This point corresponds to a of GDP given at point M and represents the equilibrium level of output in the multiplier model. This intersection of the saving and investment is the equilibrium level of GDP toward which national output will gravitate.

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