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    I was wondering under the loanable funds model in a closed economy. Would austerity lead to a decrease in private savings (due to Y staying constant or decreasing and taxes increasing) or would private savings increase due to being more incentivised to due to weakening economic outlook.

    Any help is appreciated
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    (Original post by A level sufferer)
    I was wondering under the loanable funds model in a closed economy. Would austerity lead to a decrease in private savings (due to Y staying constant or decreasing and taxes increasing) or would private savings increase due to being more incentivised to due to weakening economic outlook.

    Any help is appreciated
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    According to the loanable funds income is assumed to remain unchanged and it assumes that income and savings are independent of each other. Savings vary only with the interest rate so according to loanable funds theory austerity will not impact on savings. This is one of the weaknesses of loanable funds theory.
    Hope this helps
    Dr Mark Potts
 
 
 
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