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ECON 105

How do savings fund investment?

Follow savings into investment, then see how borrowing, capital inflows and expected inflation change the loanable funds market. Learn the ideas and solve 10 questions with worked answers.

Where savings come from · Step 1 of 12

Save what is left after spending

Northland: sources of investment funds ($ billion)
Funds: total 200
Private
Private: 200Budget: 0
Funds, total 200; Private 200, Budget 0
Amount ($ billion)Value
Private savings200
Budget balance?
National savings?
Investment?
In invented Northland, GDP is 1,200 billion dollars, government transfers are 40 billion and taxes start at 260 billion. Private savings are income plus transfers, less taxes and consumption. Buying a machine is investment spending; buying an existing share is a financial asset purchase.
Try it: Raise consumption. Watch private savings shrink.
Consumption ($ billion)780
Income
1,200
Private savings
200
Sprivate = GDP + TR − T − C.
Sprivate = (1,200 + 40 − 260 − 780) = 200 billion.
Check yourself
Consumption rises by 10 billion with income, taxes and transfers fixed. Private savings…

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