Figure 15-6 Changes in the Capital Market
Changes in the Market Equilibrium
We are now ready to examine some of the changes that occur in the
capital market and how these changes affect the equilibrium interest rate
and levels of investment and saving.
Increases in the Supply of Saving
Anything that increases the flow of households’ desired saving at the given
interest rate will shift the supply curve for saving to the right. At the initial
interest rate, this increase in desired saving will lead to an excess supply
of financial capital and thus to a decline in the equilibrium interest rate.
As the equilibrium interest rate falls, firms will find it profitable to expand
their capital stock and will therefore increase their quantity of investment
demanded. The rightward shift in the saving supply curve will therefore
lead to a movement downward along the investment demand curve.
effect of an increase in the supply of saving is illustrated in part (i) of
Figure 15-6. Three possible causes of such an increase in the supply of
saving are provided.