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“An increase in output will lead to an increase in both national saving and investment but...

“An increase in output will lead to an increase in both national saving and investment but a fall in the price level in the long run.” True/False/Uncertain, explain and support your answer in a diagram that displays the market for loanable funds.

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Answer #1

Y=C+I+G

I=Y-C-G

I=S=Y-C-G

Therefore an increase in output will lead to an increase in national savings and investment. The interest rate will be lower. For this demand for the loan will be increased. The demand curve in loanable fund shifts to the right. As a result interest rate increases and the quantity of loanable fund increases. In the long run supply of loanable fund will be decreased and interest rate will be further increased. Interest rate and price inversely related so the price will be fall in the long run.

So the given statement is TRUE.

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