How is equality of saving and investment in economy ensured

Reference no: EM13897637

"From the time of Say and Ricardo the classical economists have taught us that the supply creates its own demand ... (and) that an individual act of abstaining from consumption necessarily leads to ... the commodities thus released ... to be invested ... so that an act of individual saving inevitably leads to a parallel act of investment ... Those who think this way are deceived.

They are fallaciously supposing that there is a nexus which unites decisions to abstain from consumption with decisions to provide for future consumption, whereas the motives which determine the latter are not linked with the motives which determine the former." (Keynes, 1936, pp. 18-21). Explain this statement.

If investment and saving depend on different determinants, what are these determinants and how is the equality of saving and investment in the economy ensured? Or does it also become an identity? If it is not an identity, outline the possible scenario of the likely adjustment pattern in the economy following an exogenous decrease in consumption.

Reference no: EM13897637

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