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Homework answers / question archive / If the marginal propensity to save increases, it indicates that AD decreases, since people spend less and save more

If the marginal propensity to save increases, it indicates that AD decreases, since people spend less and save more

Business

If the marginal propensity to save increases, it indicates that AD decreases, since people spend less and save more. However, the increased savings will cause the supply of loanable funds to increase, thus the lower interest rates will drive up investment in capital goods and increase AD. Does it mean the recessionary gap will positively affect the investment? Then the recessionary gap is not bad at all, since it can spur economic growth.

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