The introduction to macroeconomics, bubbles, and investment behaviour Essay

The introduction to macrostintings, bubbles, and investment behaviour in Part Three of the module, Bubbles and the economy - Essay theoretical accountTherefore, the accounting identity can also be explained asAs shown in the above graph, the savings (s) in a closed economy is ceaselessly given exogenously. The investment in the market (I) is a function of rate of interest (r). The cost of borrowing money in an economy becomes high when the modify rate of interest is elevated. Hence, investments made in the market argon adversely related to the lending rate of interest. At equilibrium rate of interest (re), topic savings and investment remains equal to each other (S=I) (Baddeley, 2005).When the aggregate savings in an economy rise up to 30% of GDP, the investments can be expected to increase (to match savings) only if the lending rate of interest (r) falls below the previous equilibrium rate (re).(ii) The supply side policies are implemented in an economy for increasing productivi ty of its real national output, during a state of recession. These policies help an economy to grow sustainably, without the persistence of inflation (Bernanke, Gertler and Gilchrist, 1996). However, economic growth cannot be successfully achieved solely with the essence of supply side policies. The supply side approach is rendered successful with presence of adequate aggregate train in the economy. If the housing confidence slumps and the economy suffers from recession, then the individuals desire to save more and spend less. As a result, if the monetary authorities of a demesne lower interest rate and stimulate investments, then aggregate production related activities will rise, but the output produced will not be interchange adequately due to lack of consumers demand (Mankiw and Taylor, 2006).(iii) The problems associated with a supply side approach can be resolved with the help of expansionary fiscal policies. These policies will modify the government authorities to stimulat e the level of aggregate demand. Such initiatives can be undertaken by the fiscal authorities by way