Material Type:
Community College / Lower Division, College / Upper Division
Ohio Open Ed Collaborative
  • Macroeconomics
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    Savings and Investment in a Closed Economy: Course Map & Recommended Resources


    The presentation suggested by this topic is not universally used, but is an option. The objectives assume a closed economy with no flow of goods, services, or investment. Availability of quality material using this approach is limited with the OER materials available, and may require additional resource creation in the future.

    Learning Objectives

    1. Discuss the role of the financial system in facilitating long run economic growth (13)
    2. Explain the relationship between savings and investment in a closed economy (5)

    3. Utilize the loanable funds model to show how savers are matched with borrowers

    4. Utilize the loanable funds model to explain changes in market interest rates (5,6)

    5. Explain crowding out and how governments influence financial markets (5,9)

    6. Discuss inventory as a form of investment, a signal to firms to change production (5,8)

    NOTE: This Module meets Ohio TAG's 5, 6, 8, 9, 13 for an Intro to Macroeconomics Course

    Recommended Textbook Resources

    Resource One:

    Principles of Macroeconomics 2e. OpenStax CNX. Jun 4, 2018.

    Chapter 4: Demand and Supply in Financial Markets

    • Chapter 4, pages 92-98, covers loanable funds and changes in market interest rates.

    Chapter 7: Components of Economic Growth

    • Chapter 7, pages 174-178, covers the role of the financial system as a necessary component for economic growth to occur.
    • Additional resources will be mentioned below for LO 2 on savings and investment in a closed economy.

    Chapter 18: Fiscal Policy, Investment, and Economic Growth

    • Chapter 18, pages 444-449, covers the topic of crowding out. It treats government borrowing as an increase in demand for loanable funds. An alternative is to consider it as a decrease in supply.

    Resource Two:

    Principles of Macroeconomics by University of Minnesota.

    • Principles of Macroeconomics by University of Minnesota is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License, except where otherwise noted.

    Chapter 13: The Aggregate Expenditures Model

    • Page numbers: Chapter 13, specifically page 448, covers inventory as a form of investment. This is more thoroughly covered in the Aggregate Expenditures chapter, and it is recommended that you refer to that chapter.
    • Important Notes for the instructor regarding this chapter: The preferred texts for this course do not cover the objectives in a linear or complete fashion. Please see supplemental content/Alternative resources below for other options.

    Supplemental Content/Alternative Resources

    For additional coverage on these objectives, refer to: Macroeconomics: Theory Through Applications

    Licensing Information

    This text was adapted by Saylor Academy under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensor.

    CC BY-NC-SA 3.0

    Saylor Academy would like to thank Andy Schmitz for his work in maintaining and improving the HTML versions of these textbooks. This textbook is adapted from his HTML version, and his project can be found here.

    How to cite this work:

    • Publisher: Saylor Academy

    • Year Published: 2012

    Topic Exercise

    As a data exercise, the issue of crowding out can be examined. While it is discussed from a theoretical perspective, an examination of interest rates and government budget deficits might indicate something different.

    Ask students to create a graph of interest rates to the government budget deficit (or surplus). Theoretically, the interest rate should increase when the deficit increases, and decrease when the deficit decreases, or a surplus is attained. We would expect there to be a lag between increases in the deficit and the impact on interest rates. When deficit spending increases, is there a lagged response in interest rates?

    What does the result suggest? Does an increase in the government budget deficit tend to lead to an increase in interest rates? What other factors might influence interest rates?

    Active Learning Exercise

    The following link provides information on an educational game to demonstrate the loanable funds model, with a possible extension using the Federal Reserve’s discount window: A classroom game to teach the principles of money and banking

    This game has a creative commons license:

    © 2015 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license

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