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If savings is less than investment what will happen to interest rates in the Classical model?

If savings is less than investment what will happen to interest rates in the Classical model?

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Answer #1

According to the theory demand and supply determines the interest rate the theory also called the real theory of interest rate.According to the classical economist, interest is the price paid for the supply of savings.

And Supply of savings increasing function fo interest rate higher the interest rate higher the savings. And investment is decreasing function fo interest rate lower the interest rate higher the interest rate.

The intersection of supply of savings and investment determines the interest rate

If savings are less than investment results it increases the interest rate since the supply of savings is less and demand for investment is more the interset rise it induces supply of savings.

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