Problem 13 According to Keynes, can an incr... [FREE SOLUTION]

Chapter 10: Problem 13

According to Keynes, can an increase in saving shift the \(A D\) curve to the left? Explain your answer.

Short Answer

Expert verified

Yes, according to Keynes, an increase in saving can shift the AD curve to the left. The reason is that increased saving reduces consumption expenditure, thereby decreasing aggregate demand. The decrease in aggregate demand results in a leftward shift of the AD curve.

Step by step solution

Understanding the Keynesian Theory

Keynesian theory emphasizes on the total spending in the economy and its effects on output and inflation. Keynes asserted that aggregate demand is influenced by a host of economic decisions both public and private, which can sometimes behave erratically. In the case of saving, according to Keynes, when individuals save their money instead of spending it, this can decrease aggregate demand.

Impact on Aggregate Demand

Aggregate demand, in the Keynesian viewpoint, is influenced by a number of factors and saving is one of them. Saving in this context means, people do not spend their income but are securing it for the future. This can decrease consumption expenditure thus affect aggregate demand. Thereby, there will be a reduction in the demand for goods and services, which could shift the aggregate demand curve to the left.

Interpreting the Result

Based on Keynes's economic theory, if people save more, it reduces their current consumption expenditure. With decrease in the expenditure, aggregate demand decreases that can shift the aggregate demand curve to the left. This is because the aggregate demand curve shows the quantity of goods and services that households, business, government, and customers abroad want to buy at each price level.