Using an S–I (saving–investment) diagram, explain how a rise in consumers’ savings affects desired n

What the S–I diagram is showing

The S–I diagram (also called the loanable-funds diagram) plots the real interest rate $r$ on the vertical axis and saving and investment on the horizontal axis. Equilibrium is where desired national saving $S(r)$ equals desired investment $I(r)$, so $$S(r)=I(r).$$

How higher consumer saving shifts the saving schedule

When consumers decide to save more (consume less) at each real interest rate, desired national saving increases at every $r$. Graphically:

• The $S$ curve shifts right (or outward) from $S_0$ to $S_1$.
• The $I$ curve does not shift because the change described is in household saving behavior, not in firms’ investment opportunities.

What happens to the real interest rate

With more saving available, there is excess saving at the original interest rate $r_0$ (meaning $S>I$ at $r_0$). The real interest rate must fall to restore equality $S=I$. So the equilibrium real interest rate decreases from $r_0$ to $r_1$.

What happens to equilibrium investment and equilibrium saving

Investment is typically decreasing in the real interest rate: as $r$ falls, borrowing and funding projects becomes cheaper, so firms want to invest more. In the diagram this is:

• A movement along the unchanged $I$ curve to a higher quantity of investment.

In the new equilibrium:

• Desired national saving is higher (because the saving curve shifted right).
• Equilibrium investment is higher (because lower $r$ increases investment demanded).
• The real interest rate is lower.

Quick summary in “shift and move” language

• Shift: $S$ shifts right.
• Move: along $I$ to a larger $I$.
• Price effect: $r$ falls.
• New equilibrium quantity: both $S$ and $I$ are higher, with $S=I$ at the new intersection.