Page 51 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Equilibrium

The capital market equilibrium is attained at that real ROI at which saving equals investment.
Graphically, it is attained where the saving and investment curves intersect.
In the Figure 3.11, the saving curve is vertically parallel because it is assumed that IE=SE. The
equilibrium is at E. In the Figure 3.12 the saving curve is upward sloping because it is assumed
that IE is less than SE. The equilibrium is at E. The equilibrium real ROI is Or.

Figure 3.11
Y
Real
R/I S

r E

I

X
O I S, I

Figure 3.12
Y
Real
R/I
S

r E

I

X
O I S, I

Shifts in S and I and Real ROI

Given capital market equilibrium, if the saving curve shifts rightwards (Figure 3.13), real ROI
falls; if shifts leftwards (Figure 3.14) real ROI rises. If the investment curve shifts rightwards
(Figure 3.15), real ROI rises; if shifts leftwards real ROI falls. (Figure 3.16)

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