Question: In Figure 5(b), we assumed that when saving rises, none of the additional saving enters the loanable funds market. Suppose, instead, that 40 percent of

In Figure 5(b), we assumed that when saving rises, none of the additional saving enters the loanable funds market. Suppose, instead, that 40 percent of any additional saving is supplied to financial intermediaries, while the rest goes into safes and mattresses. Also assume that 30 cents out of every dollar provided to a financial intermediary is lent out. If there is no other deviation from the normal functioning of the loanable funds market, determine the impact of a $100 billion increase in annual saving on (a) planned investment per year and (b) total spending per year.

No Change in Planned Investment Spending +$0 Loanable Funds Market Consumption Spending $100 Billion $100 Billion Saving

No Change in Planned Investment Spending +$0 Loanable Funds Market Consumption Spending $100 Billion $100 Billion Saving +$0 +$100 Billion Safes and Mattresses

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