- Mark Skousen
The economic climate is a depiction of general economic patterns or moods both on a global level and on a regional level. It takes into account how the stock market is coping, unemployment levels and more. Business and consumer confidence are economic indicators that measure how optimistic consumers and business owners are about the overall state of the economy and their personal financial situation. Some factors that affect confidence levels are interest rates, policy shifts and swings in business cycles. These are all characteristics of the economic climate have a direct impact on business and consumer confidence.
An increase in savings will not lead to an increase in the level of investment expenditure in the economy in accordance with the components of classical theory and the way the circular flow model functions.
Graph of savings against investment
The circular flow model
Classical economics says Y=C + S (where Y is income, C is consumption and S are savings ) which means households use a part of their income on expenditure and the savings that households undertake are put into financial institutions such as banks which lend funds to firms who want to invest in their business. Interest is the basis for savings. The incentive for individuals to save part of their income is known as interest. Interest is expressed as a rate and is given alongside the amount you sav...
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...th saving and investment are dependent on the interest rate. In the sense that an increase in savings usually reduces interest rates which act as an incentive for firms to invest. On the other hand, if households don’t save, financial institutions use a higher interest rate to lure them to do so. In turn, when households save there is a reduction in expenditure which means the investment benefit to firms is disoriented according to the circular flow model. When household saves, firms aren’t receiving. Likewise, with higher interest rates, the returns on saved funds would discourage investment related to lending which would cause investment to have a high opportunity cost. As a result, investment postponed until interest rates are more beneficial to investors so an increase in savings will not lead to an increase in the level of investment expenditure in the economy.
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