Question

Ex-post (in an accounting sense), Savings __________ equals Investment. However, ex-ante, __________ desired savings may very well be different from __________ desired investment. It is the __________ which adjusts to make desired savings equal to desired investment.

Answer 1

Ex-post (in an accounting sense), Savings ALWAYS equals Investment. However, ex-ante, DESIRED savings may very well be different from  DESIRED  investment. It is the REAL INTEREST RATE which adjusts to make desired savings equal to desired investment.

Explanation:

• In the basic, closed economy model, Savings=Investment. The reason for this is because, in this model, growing capital stock is not the only item taken into account in Investment. The other item is inventory accumulation.
• Savings is whatever is left over after income is spent on consumption of goods and services, investment is what is spent on goods and services that are not 'consumed', but are durable.
• Equilibrium in the goods market can be expressed in two equivalent ways: (1) desired national saving is equal to desired investment; AS = AD.
• The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.