CFA Practice Question

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CFA Practice Question

In the short run, an increase in saving might ______

A. raise aggregate demand by increasing consumption.
B. reduce aggregate demand by reducing investment.
C. reduce aggregate demand by reducing consumption.
Correct Answer: C

Aggregate demand will fall if the increase in saving reduces consumption more than it increases investment.

User Contributed Comments 7

User Comment
sharon I thought A is not wrong initially. But saving reduces consumption, biz will be hurt to invest.
zuke Key here is in the short run. In the short run demand will decrease. However in the long run firms will use the capital to increase productivity and decrease prices. There demand will eventually increase.
mtcfa Taking Zuke's comment further... in the long run demand will increase as the supply of loanable funds has increased...leading to lower interest rates. Correct?
anricus That is my understanding
guna Taking mtcfa's comment one more step, lower interest rates will make firms to finance new projects as the cost of borrowing is cheap and hence investments will increase. Also lower interest rates drives down price levels that results in more consumption. Increases in Consumption and Investments will shift or raise the AD up.
mchu I guess saving is not the investment it refers here.
bobert I think investment as they refer to it, is in the economic sense. This is investment as referred to the purchase of plants, building, and machinery, which would only be long run.
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