[VRWCmember]

Under the Equilibrium Income Model, an increase in savings leads to a decline in national income -- a phenomenon called the Paradox of Thrift.

The basis of this model is that on the income side you have consumption + savings and on the expenditure side you have production (for consumption) and investment. (Actual Investment includes inventory). As long as savings is equal to or less than intended investment, the economy will be at equilibrium or growing. The reason for this is that if savings is equal to or less than intended investment, then consumption spending is equal to or greater than planned production of consumption goods. As a result, inventories (part of actual investment) become depleted and producers will increase production (requiring additional labor and investment) leading to increased national income.

Here's where the Paradox of Thrift comes in: If savings is greater than intended investment, then consumption spending is less than production of consumption goods. As a result, actual investment exceeds intended investment and inventories accumulate. In this condition of excess inventories, producers reduce output, reduce the employment of labor resources and thus national income decreases.

This nutshell presentation of the Equilibrium Income model may be difficult to fully grasp if you are not already familiar with the Aggregate Demand and Aggregate Supply model, the Expenditure and Income Components of Aggregate Demand and how these components make up the GDP, etc. I hope it was helpful.

[uncitizen]

More money in savings accounts means the banks have more money to lend. The borrowers of that money will presumably spend it on something or invest it.

[Tijeras_Slim]

You spelled antirrhopus wrong.

[rwfok]

http://deinonychus.blogspot.com/

I don't read DU. Did they have even the faintest clue?

[Temujin]

C+I+G+(ex-Im) = GDP. Aggregate Demand.

Increasing I , investment, will increase GPD. This is the aggregate expendatures model of caluculation GPD using the Aggregate supply/aggregate demand graph.

It is MacroEco 101.

To try to increase investment , the government can embark on Expansionary Monetary or Fiscal policy. Expansionary monetary policy has to do woth Fed Expansions of the money supply. Expansionary Fiscal Policy has to do with ether the government spending monmey or cutting taxes, or , of cource, both.