Question

The fundamental relationship between savings and investment spending in an economy is that: A. savings will increase as investment spending decreases. B. investment spending and savings are always equal. C. investment spending promises higher financial returns than savings. D. savings will decrease as investment spending increases.

Answer 1

The correct option is B

Explanation:

In an economy, planned investment spending is always equal to planned saving. If actual saving falls short of (exceeds) planned saving, then actual investment falls short of (exceeds) planned investment.

That is the other part of the saving paradox. If an economy produces too much, such that saving is greater than planned investment, inventory will build up, giving signal to producers to reduce output, to restore equilibrium. Such investment scheme is suitable only to communist countries. Keynes has another investment theory in his liquidity story. But investment theories are equally a posterior.

Therefore, Option B is correct