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| Home About the TEDC The TEDC at Work Commercial Areas Doing Business in Teaneck Real Estate Community Resources In the News Maps & Directions Terms / Conditions / Policies Contact Us | Savings, investment and interest rate. To understand the mechanism of which we just talked about, one must begin with a statement made by classical ideas about the functions of savings and investment. Classical economists have noted first that no reasonable person, intending to make savings, will not keep them in liquid form, if he can use them in such a way that they brought him a percentage (by buying shares or bonds, bank deposits, etc. etc.), and argued that if the interest rate rises, people are encouraged to save more, and conversely, if the interest rate goes down, they tend to save less. As regards investment, there is reasoning as follows: Entrepreneurs tend to use the proposed market investment opportunities, waiting each time to get some profit margin. So they are willing to offer a "prize" to those who provide them with the funds needed for investment. If the percentage of those whose loans are available, less than normal profits from this investment, the entrepreneur finds it advantageous to take the money and make loan investments. It should be noted that in actual economic systems, the margin between these categories of economic actors blurred: an entrepreneur makes extensive use of in-house savings to finance investments. If the rate of interest equal to the rate of profit, the entrepreneur will be indifferent to whether to take a loan or not and, accordingly, make investments or to abandon them. From these considerations it is clear that investments are considered the classics as a function of the rate of interest. Thus, in the classical model there are market funds, which offer savings represented by the demand - investment and price - the rate of interest. Growth rate of interest continues until you reach a value of, which guarantees the equality of savings and investment. Thus, the movement rate of interest in a market of free competition can ensure the equality between savings and investment and, consequently, the equality between aggregate demand and supply. Thus, the validity of Say's law is also proved for the case when the savings and investments are taken into account. |
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