Question

Name one factor that could increase the supply of saving and one that could increase the demand for saving. Discuss the effects of each on saving, investment, and, the real interest rate.

Answer 1

Answer:

Factor that increases the supply of saving: High rate of return

Factor that increase the demand for saving: Confidence in return of business in the future, low rate of interest

Explanation:

Interest rates impacts the rate at which borroweres lend money which in turn determines the influx of savers (lenders). For example, if a business owner lacks the funds to raise capital for business (investment), the next route is usually to borrow money. Money is only borrowed when there is confidence in the business as most times, loans are repaid in the future. Also, if the interest rates are low, it's easier to pay back the loan but if the interest rates are high, this could affect the loan payback in due time (especially if the returns on the investment made or the profits made for the business is not enough to pay back the interest). This factor affects the demand for savings.

The demand for saving ultimately affects the supply of savings because with low demand of borrowing and a high supply of savings leads to a low interest rate, and a low interest rates doesn't appeal investors to save more money. This is simply the law of demand that states demand decreases when the rate of return is high.  While the law of supply states that supply increases when the rate of return is high.

The effects of these factors on investment: rate of return changes the flow of influx of investors as one would only want to invest when the compund interest would be high irrespective of the permissible risk involved.

The confidence in an investment  would also affect the rate at which one would demand for savings (loans) towards that investment.