A Federal Reserve publication notes: During recessions, decreases in consumption [from an increase in saving] could inhibit

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A Federal Reserve publication notes:
During recessions, decreases in consumption [from an increase in saving] could inhibit economic recovery. However, in the long run, the accumulated money from individual savers is available for capital investment, a situation where businesses borrow to purchase capital (e.g., machinery and technology).

a. Briefly explain why decreases in consumption might inhibit economic recovery. Illustrate your answer with an AD–AS graph.
b. Use an AD–AS graph to illustrate the effect on the economy in the long run of the increase in saving described in the second sentence of the quotation.

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Money, Banking, and the Financial System

ISBN: 978-0134524061

3rd edition

Authors: R. Glenn Hubbard, Anthony Patrick O'Brien

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