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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. 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.
Expert Solution
The chain of events described is logical and could occur in reality. However, it is misguided to think the recessionary gap, in itself, is positively affecting the investment. Moreover, a recessionary gap does not, in itself, spur economic growth. Rather, a recessionary gap is typically accompanied by economic characteristics (falling or low interest rates, high unemployment, diminished asset values, etc.) that are conducive to making investments and fostering future growth.
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